Zombie Title

Zombie Title exists in every state across the country and it is one more nightmare to come from the foreclosure crisis.  Zombie title occurs when a family packs up and leaves their home because they believe they no longer own it, but the foreclosure is not completed meaning the sale doesn’t occur.  Zombie title occurs when a home is “in foreclosure,” but the title remains in the borrower’s name and the borrower still owns their home.

In California this might happen after a NOTICE OF DEFAULT was 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 recording documents with the county recorder and serving them 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. Twenty-one days later they may sell it. The Beneficiary may want 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 if the lender decides not to sell.    

Before the foreclosure crisis lenders used to always follow through on foreclosure 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 applies the proceeds of the sale to the unpaid portion of the mortgage. This has changed since the housing crash. 

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 exceeds the value of the house. In some instances, it is more costly to foreclose than to leave the house to the borrower.

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 limited 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 mind about a foreclosure sale, so they rarely do. 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. Most likely the bank will wait until property values increase enough to make a sale more profitable for them.

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. They may continue to be hounded by debt collectors seeking to collect the full amount of their mortgage debt. If a gas pipe is not turned off and the house later explodes, you 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. Never abandon your property.

When you think a foreclosure sale has taken place you must 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 properly 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, you may still own your house.