If you want to write a blockbuster movie or a catchy song, zombies are great. If you want to protect your credit, they aren’t.
Upon receiving a notice of foreclosure, some homeowners move out, assuming the lender will simply take over the property. Unfortunately for these homeowners, in some cases the foreclosure process is not completed. In the meantime, the property is left vacant and often falls into disrepair or is occupied by squatters. Since the foreclosure was never completed, title remains in the homeowner’s name. This situation is referred to as a “zombie foreclosure” and it can lead to devastating results for the homeowner. While the number of zombie foreclosures has decreased in recent years, it is a situation that still plagues homeowners. In the past year, there has been a resurgence of zombie foreclosures in California.
When a home is left unattended, visible signs of distress will appear, causing the value of the property itself, and the surrounding properties, to decrease, making it even more difficult to complete the foreclosure and thus perpetuating the housing crisis. Some of the consequences for those bitten by a zombie foreclosure include liability for unpaid property taxes, homeowners association assessments, fines for failing to comply with housing codes or other ordinances, and local government bills for repairs, trash removal, and maintenance. This all leads to a lower credit score for the homeowners, making it even more difficult for them to get back on their feet, leaving them feeling like the walking dead.
Interestingly, the recent increase in zombie foreclosures may actually indicate that the market is improving. Daren Blomquist, the vice president of RealtyTrac, which collects data on foreclosures throughout the country, believes that the increase is an indication that the banks are finally moving forward with foreclosure, since they are finally entering into the public record data RealtyTrac collects.
Once the property has been foreclosed upon, borrowers should be aware of a valuable weapon in their arsenal, known as an anti-deficiency statute. This can be a bullet to the head of the devastation from a zombie foreclosure as it can cut off more loss following foreclosure. California has significant protection from deficiency judgments, though there are exceptions a borrower should be aware of. A deficiency is the difference between what the foreclosure sale brought in and the outstanding balance of the loan. A deficiency judgment, then, is a judgment based on such a deficiency and can include costs of sale and other penalties (depending on the state). Some states permit a lender to foreclose on a property and seek the deficiency. In California, a lender is barred from seeking a deficiency judgment in most circumstances. For instance, the majority of foreclosures in California are what are called “nonjudicial foreclosures,” meaning the foreclosure has no judicial supervision and is handled by a trustee. In California, a lender cannot get a deficiency judgment after a nonjudicial foreclosure (Cal. Code Civ. Proc. § 580d). However, if the borrower has a junior lien or home-equity lines of credit (HELOCs) not owned by the foreclosing lender, the borrower may face a deficiency lawsuit from those lenders.
If a lender chooses to pursue a judicial foreclosure, deficiency judgments are generally allowed. However, deficiency judgments are still barred in judicial foreclosures where the loan was 1) used to purchase a 1-4 unit dwelling that is owner-occupied (known as a “purchase-money loan”), 2) seller-financed, or 3) a refinanced purchase-money loan that was executed after January 1, 2013.
Thus, anti-deficiency statutes can provide a weapon to borrowers, but it is wise to be aware of those circumstances where they do not. For instance, anti-deficiency statutes often only work for original purchase-money loans, for residential property, and for the borrower’s actual personal residence and not second homes or investment homes. Furthermore, deficiency judgments are allowed after a deed in lieu of foreclosure (where the lender agrees to accept a deed to the property instead of foreclosing to obtain title) unless the agreement specifically states that the transaction is in full satisfaction of the debt.
The safest course of action if you are faced with foreclosure is to await an official notice to vacate before leaving your property and to confirm with the county recorder’s office that title to the property was effectively transferred. Familiarizing yourself with your state’s anti-deficiency judgment laws can also provide some guidance on your options moving forward. It is wise to consult an attorney upon receipt of a notice of foreclosure to fully inform you of the law and assist you in negotiating with the lender. And, of course, don’t forget to keep hold of your brains.