Zombie Foreclosures: The Vacant Dead

One in every five homes in the foreclosure process is sitting vacant, abandoned by the distressed homeowner and not yet repossessed by the foreclosing lender. With no one to maintain them, these zombie foreclosures are falling into disrepair, attracting vandalism and other crime and dragging down the values of nearby homes in the neighborhood.

I had the chance to speak about RealtyTrac data on this challenge facing the housing market, and listen to many other stakeholders affected by this issue, at a one-day conference hosted by the Cleveland Federal Reserve Bank on Tuesday, March 11, 2014. See the embedded video below of my panel, which included a presentation from Nikki Flowers from the Government Accountability Office followed by my own presentation (which starts at about minute 19). You can also watch clips from other panels and presentations — including lenders, regulatory agencies such as CFPB, HUD and FHFA, community housing organizations and even courts — on the event website.

Some of my takeaways from this very beneficial conference were the following:

  • Zombie foreclosures are causing major headaches for some local municipalities where they are heavily concentrated and represent a loss of revenue for county governments.
  • Zombies could also become a liability for the distressed homeowners, who may not even be aware they are still responsible for the properties.
  • In many cases zombies are a problem the banks don’t want to take on by completing the foreclosure process because of the extremely low value of the homes backing the loans in foreclosure.
  • Most parties involved agree that foreclosure should be fast-tracked on zombie foreclosures, but that is easier said than done given that the homeowner is often difficult to track down, but that is necessary to serve that homeowner with the proper notices of foreclosure.

While there is no doubt about the problem, finding a viable solution is difficult, and many at the conference reiterated that there is no one blanket solution; each property will require a slightly different solution. That said, the solutions typically fall into one of two major categories, as illustrated in the accompanying info graphic.

The Cure Solution
Some zombie foreclosures can be cured if a new homeowner is interested in buying the property, often via short sale, and rehabbing. The vacant, dead foreclosure is re-animated with a new homeowner or tenant who mows the lawn, fixes the broken windows, etc. and thereby improves the value of the property and the surrounding neighborhood. Local real estate agents can often be an integral part of the solution, contacting the distressed homeowners and connecting them with buyers and banks to negotiate a sale.

The Kill Solution
Unfortunately the best solution for some zombies is a kill shot in the form of full demolition. A recent study sponsored by Harvard University of zombie foreclosures in Cleveland concluded that “gut rehab” done for decades by community development organizations is “not financially viable for most Cleveland neighborhoods,” and instead “demolition will likely remain the predominant means of blight removal and market stabilization.” The study was co-authored by by Frank Ford, who was on one of the panels at the Fed conference.

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