by Randall Szabo, Esq.
The Wolf Firm
USFN Member (CA, ID, OR, WA)

The issue of “zombie homes” (abandoned residential properties in the pendency of a foreclosure process) is well known to those in the mortgage-default industry. The abandoned property, still owned by the absent borrower, often becomes a nuisance in the community by attracting squatters and criminal activity. Law enforcement is unable to enter to address these issues without permission of the owner, who is nowhere to be found, and the lender’s options are generally limited to contractual property-preservation measures.

Meanwhile, the property may be falling into disrepair and racking up code violations, which will generally take priority over the lender’s security interest. Recent numbers have been encouraging, though, with the number of zombie foreclosures in 2019 estimated to be half of those in 2016[1]. But, the COVID-19 pandemic has raised alarms of a potential new flood of foreclosures, and lenders would be wise to anticipate and plan for the unique problems presented by zombie homes. 

For their part, states and municipalities have adopted a variety of measures to address the issue. Last year, New York State passed the Zombie Property Remediation Act of 2019, which allows municipalities to commence proceedings regarding certified-abandoned properties, thereby forcing the mortgagee to either complete the foreclosure process within a specified timeframe or discharge the mortgage. In June 2018, HB 2057 went into effect in Washington state.  This legislation allows lenders to enter abandoned properties to abate nuisances and allows municipalities to require lenders to abate such nuisances within a specific time frame.  If they do not do so the municipality is authorized to abate the nuisance and recover its costs with assessments against the property. Last year in Oregon, the Portland City Council voted to streamline its process of foreclosing on abandoned properties for code violations by removing one of the reviewing agencies. In June 2018, the city of Philadelphia also enacted an accelerated foreclosure process for abandoned properties.

While these measures may be sound public policy, the potential pitfalls for lenders are self-evident. In New York, a lender who does not pursue foreclosure within the designated timeframe could be forced to discharge the mortgage. And, where assessments have been levied against a property, or where a city foreclosure has in fact taken place, the lender’s security interest will be devalued—and in some cases lost altogether. As mentioned, city liens generally have priority over all other interests, and the amounts of the charges can quickly become immense. One way or another, the lender generally ends up on the hook.

There are steps lenders can take to avoid these harsh consequences. First, mortgage servicers need locality-specific systems in place to monitor for code violations and city liens. Once the problem is identified, a quick response can often avoid further issues. The earlier property preservation measures are taken (preferably before a violation is issued) the better. Something as simple as trimming weeds can hold off code enforcement, not to mention angry neighbors.

In many of these cases, an ounce of prevention is worth a pound of cure. While the actions of the borrower are out of the lender’s control, moving quickly through the foreclosure lessens the risk that a property will become abandoned during the process.

[1] https://www.housingwire.com/articles/49861-attom-number-of-zombie-foreclosures-has-been-cut-in-half-since-2016/

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Winter 2021 USFN Report