CFPB Takes Aim at 'Zombie' Foreclosures
The Consumer Financial Protection Bureau plans to address the growing problem of vacant and abandoned properties that banks and mortgage servicers have walked away from to avoid maintaining the homes.
Some borrowers are being harmed when a mortgage servicer starts a foreclosure but then fails to complete it, leaving borrowers on the hook for the mortgage debt, taxes and maintenance even though they may have already moved out, said Laurie Maggiano, the CFPB's servicing and secondary markets program manager.
"The CFPB is beginning to look very closely at abandoned properties and zombie foreclosures," Maggiano said Tuesday at a conference sponsored by the Federal Reserve Bank of Cleveland. "There is direct borrower harm if a borrower believes a foreclosure on their property has been conducted and they are no longer responsible, and months or years later find out that they are, that there was never a foreclosure and they have large financial responsibilities that they never knew about."
Consumer advocates have repeatedly asked the CFPB to address the issue, saying servicers are not complying with certain disclosure requirements to borrowers and anti-blight provisions that require banks to release the lien on a property or complete a foreclosure sale, rather than leaving a property in limbo.
The CFPB is participating in several industry-led task forces to try to identify the hundreds of thousands of homes that have been dubbed "zombie foreclosures."
Bank "walkaways" typically occur on low-value properties. Often a bank or mortgage servicer will determine that the cost to repair a home is more than the property is worth, and may choose not to complete a foreclosure. But that means the borrower has to continue paying the debt, taxes and upkeep.
Servicers typically flood defaulted homeowners with as many 250 letters and phone calls telling them their home is going into foreclosure, says Peter Skillern, the executive director of Reinvestment Partners, a Raleigh, N.C., nonprofit. But they usually fail to notify the borrower when the foreclosure is stalled.
"They are pushing the borrower out of the home, which results in abandonment," Skillern says. "Servicers need to make sure they are accurately communicating the status of the foreclosure process to the borrower."
Nationwide there are roughly 152,000 vacant or abandoned homes for which the servicer has not taken title to the home, says Daren Blomquist, a senior vice president at RealtyTrac, the Irvine, Calif., data firm. These properties make up roughly 22% of the 676,000 bank-owned homes that are held by banks and not listed for sale.
These zombie properties are not included in the bucket of roughly 740,000 properties currently in the process of foreclosure. Chicago, Dayton, Ohio and Philadelphia are among the cities with large numbers of so-called zombie properties.
The CFPB found "it was extremely common" for servicers to charge off low-balance loans and not notify borrowers or municipalities if they did not complete the foreclosure and take title to the property, Maggiano said. As a result, borrowers often were not notified that they were still responsible for repaying the mortgage debt, taxes and code violations.
"Most of the time [the servicers] didn't notify anybody, they just took [the home] off their books. They stopped servicing it," she said.
Though banks and servicers are not technically required to communicate with borrowers about lien releases or charge-offs, an obscure provision of the Truth-in-Lending Act requires that servicers send periodic statements every month to borrowers who have liability for delinquent mortgage debt.
That provision now is "pushing servicers to release the borrower from liability for the debt," Maggiano said. "So, it's not a technical requirement in our regulations…but we consider that to be a responsible communication to borrowers."
"Servicers are changing their behavior and communicating with borrowers about lien releases," she added.
Maggiano said she had several ideas to help resolve the problem, including creating a national definition of "abandonment," speeding the foreclosure process so vacant homes can more quickly be transferred to potential owners and nonprofits, and creating a national registry of such homes that would improve communications among servicers and municipalities.
But Frank Ford, a senior policy advisor with the Thriving Communities Institute, countered that finding out who in the city to talk to about vacant properties is "not a hard thing to do."
Ford had harsh words for Maggiano, who at one point in the conference said that servicers were caught between their responsibility to secure an abandoned property and the fear that they could be sued by the homeowner for trespassing.
"A lot of what you said is basically repeating what the mortgage servicing industry has been saying to us about trespassing versus security the property, and that's not an issue," Ford said.
He told regulators that the four largest banks should not be allowed to receive credit under the national mortgage settlement for essentially dumping such homes.
"It would be a tragedy that a bank that was held accountable for a major settlement ends up getting credit for properties that they dumped and might now be vacant, tax delinquent, condemned or demolished," Ford said at the Cleveland Fed conference.