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A zombie foreclosure is not a plotline of The Walking Dead. Rather, it's a term in real estate referring to when homeowners vacate a property too soon after receiving a foreclosure notice. The homeowner assumes the property has already been seized by the bank or lender and they are no longer financially responsible for the property. But this is not the case.
The foreclosure process is not a quick one, and until it's complete, the homeowner is still financially responsible for all costs, including property taxes and homeowners association (HOA) fees. As a result, the title -- known as a zombie title -- is still in the homeowner's name. And the property can come back, as it were, to haunt the original homeowner.
How zombie foreclosures happen
When a bank or lender initiates a foreclosure notice, it's just that -- a notice. It means the foreclosure process has begun and can likely be stopped with the payment of a sum of money, ranging from missed mortgage payments to the full debt owed. But even if the homeowner is unable to come up with the money, they still don't have to move out. It's not until the title is returned to the lender that the homeowner is forced to vacate -- and it can take months to finalize the foreclosure process.
There are two types of foreclosures. Each state has its own laws on which one is used:
- Judicial: The lender launches the foreclosure process, and it's handled by a court of law. The borrower can halt the proceedings by paying what's owed on the house. If no one stops the foreclosure, the process can be concluded in four to eight months.
- Nonjudicial: Some state real estate laws have deeds of trust, in which a third party or trustee holds the property as security until it's paid off. The trustee can start the foreclosure procedure, and the borrower has a certain period of time to either pay the debt or contest the foreclosure. If the time passes and the borrower can't come up with the money or otherwise stop the foreclosure, the date of the property auction, where investors can buy the property from the bank, is set. All told, this process can take up to a year.
The larger ramifications of zombie foreclosures
A zombie foreclosure isn't just bad news for the homeowner. It can also affect the rest of the homeowners in the neighborhood. An abandoned property can quickly become a blight on a community. Having a zombie foreclosure as a comp can decrease the value of homes in the neighborhood. Local authorities can try to recover any property taxes and other fees, such as maintenance costs, but they aren't always successful.
Where do zombie foreclosures happen?
Foreclosures can happen anywhere, but zombie foreclosures tend to happen more in lower-income communities, where properties may already not be in the best shape. There, banks might not be so willing to take back these properties. That means the foreclosure process is not completed, and the titles and financial responsibilities can remain with the original borrowers long after they have moved on.
COVID-19 and zombie foreclosures
In 2020, the real estate world -- like the world in general -- was rocked by COVID-19. According to ATTOM Data Solutions, in the third quarter, every state except for Hawaii saw a rise in zombie foreclosures (Washington, D.C., also had a reprieve). Still, out of 216,000 homes in foreclosure proceedings, only around 7,961 were considered to be zombie foreclosures. This number represents 3.7%, or 1 in every 27 foreclosed properties.
The Midwest and South are home to the states with the highest concentration of zombie foreclosures. Here are the top five:
- Kansas: 15%, or 1 in 7 foreclosures
- Missouri: 11.2%, or 1 in 9 foreclosures
- Georgia: 11%, or 1 in 9 foreclosures
- Kentucky: 10.7%, or 1 in 9 foreclosures
- Tennessee: 10.3%, or 1 in 10 foreclosures
The Northeast and Midwest have the states with the highest number of actual zombie properties. Here are the top five:
- New York: 2,136
- Florida: 1,028
- Illinois: 971
- Ohio: 887
- New Jersey: 356
How to avoid a zombie foreclosure
Not all foreclosures have to succumb to zombie foreclosure. Take these steps to avoid one:
- The homeowners should stay at the property when a notice of foreclosure is issued. It's not until they get the notice to vacate that they must leave.
- Once the foreclosure process is complete, the former homeowner must ensure the title is no longer in their name. If a zombie title remains, it could cause considerable problems in the future and make it difficult to purchase another property.
The CARES Act, which expired on August 31, temporarily stopped lenders from foreclosing on government-backed loans, which represent 70% of all home loans in the country. It remains to be seen what this will mean for foreclosure rates as we head into the fourth quarter.
The bottom line
A homeowner who has been served a notice of foreclosure does not need to vacate the residential property just yet. While it's understandable they would want to move on and get a fresh start, they must first ensure the foreclosure proceedings conclude and the title reverts back to the lender. Otherwise, a zombie foreclosure could haunt them.
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