Zombie Title

Zombie Title exists in every state across the country and it is one more nightmare to come from the foreclosure crisis.  Like a zombie, zombie title is a foreclosure that doesn’t die, meaning the title never gets transferred from the foreclosed homeowner to the bank.  This happens when a family packs up and leaves their home when they still own it because the bank doesn’t complete the foreclosure.  With Zombie title, a family may own a foreclosed property that then sits vacant for years as the grass gets overgrown and the house deteriorates. This may go on indefinitely.  

In California this might happen after a NOTICE OF DEFAULT is recorded and sent to your property. Because California is a non-judicial foreclosure state with Deeds of Trust instead of mortgages the entire foreclosure process takes place by the trustee recording documents with the county recorder and serving them to you at your property. The NOTICE OF DEFAULT you get served after you default is only the beginning of the foreclosure process. 

Three months after the Trustee of your Deed of Trust records a NOTICE OF DEFAULT with the county recorder, they may record a NOTICE OF TRUSTEE’S SALE with a foreclosure sale date. Twenty-one days later they may sell it. The Beneficiary may wait three months, three years, or thirty years before they record a NOTICE OF TRUSTEE’S SALE or they may never do so.  Even if the Trustee records a NOTICE OF TRUSTEE’S SALE and serves it to you at your property, the sale may still be canceled or postponed if the lender decides the home is not going to sell.    

Before the foreclosure crisis lenders used to always follow through on foreclosure sales either by selling a house to a third party (a bona fide purchaser) or repossessing the house as an REO (Real Estate Owned). After foreclosure, the bank applied the proceeds of the sale to the unpaid portion of the mortgage, and supplied the remainder, the surplus, to the borrower. This changed somewhat since the housing crash where many homes were overvalued and over-leveraged. 

The subprime bubble resulted in millions of properties being over-appraised and fraudulently financed so that originators could sell costly subprime loans to unsuspecting borrowers and investors. This left the real estate market swamped with homes where the debt far exceeded the value of the house and where some houses were of little value at all. In some instances, it was more costly for the bank to foreclose and take possession of the property than to simply wait and gamble that the market would change.

When a bank is about to foreclose on a valuable property they protect their investment by paying the taxes and insurance on the property if the borrower isn’t paying them. If the bank is foreclosing on a property with a low value the cost of ownership may be greater than the insurance claim they can make or the tax write-offs and other accounting benefits they can get. They may even “charge-off” the debt and make additional money by selling it to a debt collector.

No regulation requires the bank to tell you when they change their strategy regarding a foreclosure sale, so they don’t. In California, a lender can leave a NOTICE OF DEFAULT recorded against your property for years before recording a NOTICE OF TRUSTEE’S SALE or never record one. If you wait out the term (usually thirty years) of your mortgage, without the bank selling at a foreclosure sale, your Promissory NOTE will become unsecured by the mortgage and the bank will have lost the power of sale by foreclosure. The most likely scenario is that the bank will wait until property values increase enough to make a sale more profitable for them and that is when they will sell.

What happens to borrowers with Zombie title is truly worthy of a horror movie. They continue to receive tax bills, water, and sewage bills, and bills for waste removal delivered to the house after they have moved out. They may continue to be hounded by debt collectors seeking to collect the full amount of their mortgage debt without realizing why. They will be responsible for garbage that accumulates, overgrown lawns and landscaping, and crimes committed in their vacant house.  If a gas pipe is not turned off and the house later explodes, they may be responsible for the fire department costs and other damages.

If you retain title to your house, even Zombie title, it is considered an asset that will preclude you from disability benefits. You may open your mail to find bills for back taxes, graffiti scrubbing, demolition crews, trash removal, gutter repair, exterior cleaning, and lawn cutting or you may even find a summons on your door to appear in court for city code violations. If you fail to bring your house up to code or to pay these outstanding city bills, you may have your tax refund seized, your wages garnished, or even go to jail.

If you walk away from a property before foreclosure you have abandoned your property. Abandonment means you have given up possession when you still have ownership and ownership is a responsibility as well as a right.  While you still have the responsibility of ownership you should continue to exercise the right of possession even if you decide to move out of a property and lease it to others as you wait for a sale and eviction to occur.  The bottom line is that you never give up the responsibilities of possession when you are still the title holder.

Now that real estate is back to generally appreciating in value and inventory is low, the situation of Zombie Title is less likely, but still possible.  It may be more likely to occur when property is devalued by a natural disaster or a mass-layoff due to an economic downturn in one area of the country, but it will still occur because the law is designed to protect the bank and not to inform and protect the borrower.  Either way, the lesson is still a good one.  

When you think a foreclosure sale has taken place, check the county records to make sure a new Deed Upon Sale has been recorded. If a sale has taken place you will inevitably be served with a three-day NOTICE to Quit by the new owner. Respond promptly to the Unlawful Detainer case and settle on a move out date with the new owner. If a three-day notice is not posted on your door and an Unlawful Detainer lawsuit is not filed, check carefully.  You may still own your house.