The Consumer Financial Protection Bureau has turned its attention to “zombie” foreclosures, as reported by Reuters. A zombie foreclosure occurs when a bank begins a foreclosure, but then abandons the process without informing the homeowner. In most cases the zombie foreclosure is stopped by the bank after the homeowner has moved out of the home. Homeowners don’t realize that they still own their homes, and are still responsible for the mortgage debt, taxes, homeowner association (HOA) dues, and upkeep.
“The CFPB is beginning to look very closely at abandoned properties and zombie foreclosures,” said Laurie Maggiano, the CFPB’s servicing and secondary markets program manager. “There is direct borrower harm if a borrower believes a foreclosure on their property has been conducted and they are no longer responsible, and months or years later find out that they are, that there was never a foreclosure and they have large financial responsibilities that they never knew about.”
Zombie foreclosure often occurs when a bank charges off a low-value property, but does not complete the foreclosure process. By not completing the foreclosure, the bank is not responsible for the property or associated expenses, but still retains a lien which makes it impossible in many cases for the homeowner to sell the property. The property is abandoned and the unwitting homeowner may be civilly or criminally liable for violating local ordinances, failure to pay taxes, etc.
There is no requirement for banks or loan servicers to inform homeowners about lien releases or charge-offs, however the Truth-in-Lending Act requires that servicers send monthly statements to borrowers with delinquent mortgages.
Bankruptcy is little help
Bankruptcy can discharge an individual’s personal obligation to pay a mortgage debt, but a bankruptcy case does not transfer title from the homeowner to the bank. The person still owns the property after bankruptcy, even if he is not obligated to pay the bank.
Courts across the nation have said that the Bankruptcy Code does not require a lender to act upon the surrender of collateral in a bankruptcy. Until the lender is the legal and equitable owner of the property (through a foreclosure, or deed transfer), the debtor may be on the hook for HOA fees, taxes, or property insurance that arise after the bankruptcy filing. These debts are not part of the bankruptcy discharge.
If you are experiencing trouble paying your home mortgage and need to “walk away,” discuss your situation with an experienced bankruptcy attorney. In many cases, the smart move is to stay in the home (rent free) until the foreclosure is completed. Filing bankruptcy may also buy your family some time to find another home.