Editor's note: this story previously appeared in the October issue of DS News, available to read in full online.
In popular movies and TV shows such as The Walking Dead, the zombie has become a go-to favorite when it comes to both monsters and metaphors. There’s something inherently terrifying about the thought of something acting solely on instinct, a thing that’s hard to kill, doesn’t feel pain, and will just keep coming. The housing industry has borrowed the zombie name to describe a persistent problem of its own, a monster born out of the previous decade’s financial crisis but still lingering—the so-called “zombie property.”
During a June DS News webinar sponsored by Altisource Field Services, Timothy Meyer, SVP of Field Services, Altisource, summed up just how many challenges are involved for servicers, attorneys, and field servicers tasked with combating zombie properties, “It really is critical to have a multipronged approach to effectively manage zombie homes,” Meyer said. “A full toolbox, if you will.”
During the “Zombie Homes—Challenges and Guidance” webinar, moderator Rick Sharga, EVP, Carrington Mortgage Holdings, explained that the term was “coined during the heat of the foreclosure crisis.” He also pointed out that the real estate industry’s use of the term predated zombies’ most recent resurgence in pop culture. “We’d like to take credit as an industry for the ridiculous popularity zombies have today in entertainment media,” Sharga joked.
Sharga explained that the “zombie” nickname is tied to characteristics these empty homes share with their brain-hungry on-screen namesakes: “They’re properties that are neither one thing nor another but a little bit of both. These properties are typically somewhere in the foreclosure process. They’re vacant, having been abandoned by the borrower but are not yet under the control of the lender or servicer. They’re often the byproduct of well-meaning
but poorly executed legislation and regulations.”
In a Policy Focus Report entitled, “The Empty House Next Door: Understanding and Reducing Vacancy and Hypervacancy in the United States,” Researcher Alan Mallach analyzed U.S. Census and Postal Service data for 15 American cities, examining the increasing occurrences of “hypervacancy” in these cities, which the report defines as when at least one in five properties is vacant within a given area.
Mallach also spotlighted increases in the number of properties that have been “effectively abandoned”—unused, empty properties that are neither for sale nor for rent. According to the report, the number of units that are effectively abandoned has increased nationally from 3.7 million in 2005 to 5.8 million in 2016. That was an uptick of 2.1 million units—“ roughly equal to five times the entire housing stock of San Francisco.
During the DS News webinar, Dawn Adams, SVP, Default Servicing, Roundpoint Mortgage Servicing, said, “Vacant properties lower not only the value of that property but the value of the properties surrounding it as well.”
Zombie properties tend to proliferate in states that feature a judicial foreclosure process, wherein the foreclosure proceedings have to make their way through the court system. Regulations in these states have sometimes extended the foreclosure process beyond 1,000 days, Sharga said. At the peak of the crisis, these foreclosures could sometimes drag on for as long as 1,300 days in states such as New York and New Jersey. The metropolitan areas with the most zombie foreclosures include New YorkNewark-Jersey City, Philadelphia, Chicago, Miami, and Tampa-St. Petersburg.
“In many of these cases, the borrower simply left before the foreclosure process was completed,” Sharga said.
Stephen Hladik, Partner, Hladik, Onorato & Federman, remarked, “My standard joke is that ‘judicial’ is a Latin term meaning ‘really slow foreclosures.”
DEFINING THE ENEMY
Abandonment of a property leaves lenders and servicers in dire straits, often with no clear right to maintain or enter the home and no right to reclaim the property until the foreclosure process finally reaches its end. Standing empty,
these homes can fall into disrepair, becoming eyesores, creating safety hazards, and even attracting squatters—sometimes of the criminal variety.
Thankfully, the number of zombie properties has been dropping steadily over the years. According to data from ATTOM Data Solutions, over 14,000 properties in the foreclosure process were vacant as of the end of Q3 2017. That’s down from a peak of 44,000 properties in Q3 2003, and those 14,000 homes represent 4.18 percent of all properties in foreclosure.
Vacant REO properties also face some—although not all—of the same problems as abandoned zombie foreclosure homes. According to ATTOM data, there are over 24,000 vacant REO homes nationwide, representing 15.33 percent of REO inventory. They tend to cluster in many of the same locales with zombie foreclosure problems—New York, New Jersey, Chicago, etc.
In June 2017, the National Mortgage Servicing Association (NMSA) published a white paper entitled “Protecting Consumers and Communities: Proposal for Standardization of Key Definitions, Guidance, and Best Practices for the Preservation and Maintenance of Vacant & Abandoned Residential Properties.” Among other things, it highlighted one of the primary problems zombie homes present to the industry—a lack of consistent definitions when it comes to determining what qualifies a property as “vacant” or “abandoned.” Common-sense definitions won’t necessarily pass muster here, as it’s not about defining the terms for general purposes—it’s about defining them from a legal standpoint. Statutes and regulations vary wildly when it comes to determining what constitutes a vacant property.
“You wouldn’t think it would be that complicated,” Sharga said, “but our court system has made sure that it is.” Many of the servicers, attorneys, and field servicers tasked to deal with these empty properties would be happy just to have a simple, uniform definition of what counts as vacant and abandoned.
“From a legal standpoint, there are numerous issues as to how you quantify what counts as vacant and abandoned,” Hladik said. As an example, Hladik cited vacation homes, which may only be physically occupied for a couple of months out of the year. That being said, they clearly are not abandoned even though they may spend a majority of their time standing empty.
Some characteristics used to define vacant or abandoned properties in areas around the country do come down to common sense. Is the property boarded up? Is the grass overgrown, is trash accumulating, or are there other telltale signs that the property is not being maintained? However, other times municipalities have to look beyond the most obvious signs. Hladik explained that some city code enforcement officers will check to see if the utilities to the property are shut off, if mail is still being delivered, and even if copper wiring or other valuable materials have been stripped from the building.
The accumulation of multiple municipal citations against a property is another common red flag, especially if they have not been remediated. Local codes allowing a property to be deemed “uninhabitable” can also prove useful when it comes to dealing with vacant and abandoned properties that may otherwise be mired in a foreclosure quagmire.
But it can get even more complicated because even where definitions of ‘vacant’ and ‘abandoned’ exist, servicers may face a reality where contradictory definitions butt up against each other. As Dawn Adams told DS News, servicers typically deem a property abandoned once a borrower has notified the servicer of their intention to vacate and relinquish rights to the property. However, most regulatory requirements hang the definition of “abandoned” on the condition of the property as well as the occupancy status. In general, the definitions of abandoned and vacant are very different. Unfortunately, based off regulatory requirements in some jurisdictions, the lines are blurred between the two. This can put the burden on the borrower to confirm that the property is vacant and not abandoned, a position most servicers are not willing to put the borrower in.
Nevertheless, there are innumerable issues lenders and servicers must face when it comes to legally establishing a property as vacant and abandoned. As Hladik explained, servicers need to determine whether they can unilaterally make that decision for themselves, which is a possibility in some cases. In some cases, servicers can have a local code enforcer sign off on a certification of abandonment, or they can retain a local property inspector to make the
However, if a servicer signs an affidavit certifying that the property is vacant and abandoned, but that determination is later proven to be incorrect, that could open the servicer up to liability or even charges of perjury. The same risk faces property-preservation vendors who might otherwise be able to sign off that a property is abandoned. It’s an inherently convoluted process made all the more complicated by that lack of uniform definitions that could serve as an industry standard.
Adams explained that one alternative for servicers operating in judicial foreclosure states is to have their process server visit the site and sign the affidavit certifying that the property is abandoned.
SPEEDING THINGS UP
George Romero, the legendary horror director whose films Living Dead films introduced the modern version of zombies into the pop-culture lexicon, filmed many of those movies in Pennsylvania. In an odd twist of fate, Pennsylvania has also recently been both a zombie property hub and a strong proponent for smarter legislation when it comes to tackling the problem.
“Philadelphia is a prime example of how this issue has perplexed many cities across the country,” Hladik said. Philadelphia was spending millions of dollars on issues stemming from vacant and abandoned properties, ranging from standard maintenance issues to those related to crime, including arson. The problem was exacerbated by the lengthy foreclosure timelines necessitated by the state’s judicial process.
“In some cases, I could complete an entire owner-occupied foreclosure, and evict them in less time than it would take to foreclose on an abandoned property,” said Hladik. He noted that completing a vacant or abandoned foreclosure in Pennsylvania could also cost “two to three times as much” as an owner-occupied foreclosure, simply due to all the extra steps and paperwork involved.
“Length of foreclosure actions is one of the biggest challenges,” said Steve Staid, SVP, Servicing for PHH Mortgage. “Few states have an expedited process when a property has gone vacant or abandoned. While we make every effort to secure and preserve properties, the blighted areas tend to have a higher level of vandalism and crime, which perpetuates the issue.”
“This is a state-by-state challenge since foreclosures actions are driven by state law,” Staid continued. “It is difficult for servicers to raise discussions around expediting foreclosure without appearing that the industry is simply trying to speed up all foreclosure actions, not just those subject to blight.”
In June 2018, Pennsylvania Governor Tom Wolf signed HB 653 into law. The bill provides for an accelerated foreclosure process for vacant and abandoned properties. The current foreclosure process in Pennsylvania can take anywhere from 300 to 540 days. The new legislation aims to reduce this timeframe by 240 days by providing “a process to have a property certified as vacant and abandoned, either by a municipal code officer or through judicial certification, before an expedited foreclosure may commence.” The legislation also specifies the process a lender must follow when using expedited foreclosure on these properties.
Among other things, Pennsylvania’s streamlined foreclosure statute will allow municipal code-enforcement officers to certify a property as vacant or abandoned if it demonstrates multiple characteristics such as boarded-up windows, the removal of furnishings, termination of utilities, or the accumulation of trash or mail on the property. The bill also allows the servicer to opt into an expedited sheriff’s sale of the property.
“This new Pennsylvania law will help lenders and servicers prevent blight or expedite the restoration of deteriorated properties, getting them back in condition to sell or rent, and eliminating the safety hazard that these vacant properties often represent,” Sharga said. “Accelerating foreclosure proceedings on vacant and abandoned properties is a win for all parties involved: neighborhoods, communities, and local governments, in addition to lenders and
“This new bipartisan legislation is a significant improvement to the fight against blight, as well as serving to eliminate the accompanying delayed and costly foreclosure process that came with vacant or abandoned properties,” Hladik told DS News. “Cities throughout the Commonwealth carried a significant cost—as well as a budgetary depletion—in having to maintain vacant properties. The new procedures put in place by this law give servicers and lenders the opportunities to fast-track foreclosures of vacant properties and quicken the pace lenders can restore these homes to the tax-producing rolls.”
Pennsylvania is just one of many states to adopt streamlined foreclosure legislation in recent years, and it’s proven to be an effective tool in combating urban blight stemming from abandoned properties. Other states with streamlined foreclosure legislation include New Jersey, Connecticut, Kentucky, Maine, and Washington, to name just a few.
Expedited foreclosures offer several benefits for servicers, Adams explained, including providing a clear and marketable title, enabling proper maintenance of the home, and becoming an active part in neighborhood revitalization.
However, expedited foreclosures aren’t a perfect solution either. “Expedited foreclosures potentially put the burden on the borrower to confirm the property is not abandoned,” Adams said. “This can cause the borrower to incur additional legal costs as well. We need agency and insurer support through the creation of more education and outreach for borrowers that want to exit the home,” Adams continued.
Adams explained that just how much expedited foreclosures can affect the timeline of the process varies significantly, depending on the locale. In New York, an expedited foreclosure can decrease the timeline between service and judgment by an average ranging between 120–360 days. In New Jersey, the timeline between complaint to judgment can be decreased, as can the timeline from judgment to sale. The 2018 averages for decreased timelines in New York ranged between 30–300 days.
Sometimes, however, the gains are negated by other factors. “The timeline decreases you see for both Connecticut and Maryland are offset by other legal filings you have to complete in order to get the expedited foreclosure,” Adams said.
In a summer 2018 report entitled “Fast Track Foreclosure Laws: Not a Silver Bullet for Fighting Blight,” the National Community Stabilization Trust (NCST), a nonprofit organization focused on restoring vacant properties, attempted to review the efficacy of such laws but was unable to reach a conclusion. The nonprofit explained that there was insufficient data to truly examine fast-track proceedings in various states “either because some states do not specifically track data on motion filings and foreclosure timelines or because this data is not publicly available.” Based on the available data and anecdotal evidence from interviews conducted in four states, the NCST concluded that even where “fast-track” foreclosures were available, the option was rarely taken.
The NMSA also developed a white paper discussing fast-track foreclosure policies, developed with input from several NMSA member organizations, including Wells Fargo, Bank of America, BankUnited, Selene Finance, and others.
FACE TO FACE WITH THE ENEMY
“We start inspecting delinquent properties on the 45th day of delinquency and then monthly after that,” Staid said. “If a property becomes unsecured or starts to deteriorate, steps are taken to secure and maintain the property and address items such as grass cuts that could be a ‘beacon’ to the area that the property is vacant.” Staid added that the lack of common definitions of ‘vacant’ and ‘abandoned’ did make things more difficult but suggested that “hiring a local property-preservation contractor who knows the local requirements makes the process manageable.”
This includes leveraging data and reporting, particularly around inspections. Meyer said that it’s vital for property preservation companies to ensure accurate exterior inspection reporting prior to the validation of first-time vacancy and the securing of the property to help drive decision-making.
“It is important and invaluable to know what is coming in your inventory,” Meyer said. “Use high-risk data mapping. Use the data you have from prior inspections and from those localities in your reporting to assess which properties are at risk.”
When it comes time to conduct the first interior inspection, Meyer emphasized that it must be comprehensive and that your initial preservation review must include a bid proposal to address possible damage to the property and to complete an assessment of any work required to comply with local requirements or remediate any outstanding violations. Timeline management and accurate reporting are essential for the effective preservation of zombie properties, Meyer said.
Meyer also highlighted the importance of maintaining strong relationships with local code officers and other community officials. These relationships can minimize escalations, simplify the points of contact, and allow property-preservation companies to more quickly respond to issues in the field. It also helps increase a company’s local presence and knowledge of the area and cultivates the trust of those local officials.
“It is critical to be proactive and comprehensive,” Meyer said.
TURNING THE TIDE
Just like the protagonist of a zombie apocalypse movie, those on the front lines in the fight against zombie homes may sometimes feel like the problem is overwhelming and unending. But, as attested to by the overall stats cited earlier in this story, progress is being made, often by individual states and municipalities thinking outside the box and experimenting to see what works best.
The late Robert Klein, Founder and Chairman of Community Blight Solutions and Safeguard Properties, was a fierce proponent of legislation designed to combat the urban blight to which zombie homes contribute. Klein helped lead the charge to replace plywood with polycarbonate clear boarding for securing vacant properties, and Fannie Mae banned the use of plywood in March 2017.
Klein also advocated for legislation supporting the fast-tracking of foreclosures on abandoned properties. States such as New York, New Jersey, Ohio, and Illinois have enacted versions of such legislation in recent years.
Klein passed away in May 2018 at the age of 65, but his legacy lives on through the companies he founded and the anti-blight initiatives he championed.
“It’s all about keeping people in their homes as long as possible, but, once abandoned, a house becomes a liability,” Klein told DS News during a 2017 interview. “Fast-tracking enables the mortgage servicer to get possession of the property before it deteriorates. This directly leads to on-time conveyance and faster rehab and sale.”
In February, New York Gov. Andrew Cuomo announced that the state was buying up distressed mortgages in high foreclosure areas, hoping to help keep homeowners in their homes and avoid the spread of more zombie properties.
In July, U.S. News and World Report revealed that Chicago had spent nearly $170 million fighting the problem in the aftermath of the financial crisis, courtesy of HUD’s Neighborhood Stabilization Program. In 2011, Chicago city government launched an initiative called the Micro-Market Recovery Program (MMRP). The MMRP narrowed its focus to specific blocks that had high concentrations of these abandoned foreclosure properties, then set out trying to figure out ways to rehab them into affordable homes for rental or purchase.
Between 2011 and December 2018, a combination of city budget, grants from nonprofits, and other sources will have invested nearly $13 million in MMRP. The Illinois Attorney General’s office also chipped in approximately $3 million, courtesy of a settlement with banks accused of unscrupulous lending practices leading up to the financial crisis. U.S. News reported that foreclosure filings in the targeted areas decreased by “double digits” between 2011 and 2016, with the northern targeted region seeing a 67.6 percent decrease.
In an August letter to Department of Housing and Urban Development (HUD) Secretary Ben Carson, Senator Chuck Schumer (D-New York) urged HUD to approve the Asset Control Area Renewal Agreement, which would allow officials in Rochester, New York, to acquire vacant homes and rehabilitate them. The agreement with HUD had been on the books since 2003 and had allowed Rochester to acquire 750 foreclosed homes for rehab. The agreement also was typically renewed every two years, but it expired in February, forcing the city to stall its plans, leaving the fate of 2,000 zombie homes waiting for a decision.
Schumer’s office said that it estimates that each zombie property in the city of Rochester is worth $15,000 to the local tax rolls. At 2,000 properties, that translates to $30 million.
In June, Washington State’s HB2057 took effect, allowing Washington municipalities to directly contact the lenders or servicers responsible for an abandoned property and report problems such as squatters, tall grass, or accumulated garbage on the property. The contacted party then has 15 days to respond, and 15 days after that to resolve the problem. If the lender does not comply, the city can then legally hire someone to take care of it and then bill the lender. If that payment is not made, the city can then place a lien on the property.
Earlier this year, Erie County Clerk Mickey Kearns and the Western New York Law Center announced a partnership with Columbia Law School to help municipalities within Erie County track and monitor zombie foreclosures. The partnership enlists Columbia Law School students to lend their research skills to local municipalities in the fight against zombie homes, providing resources those cities and towns might not otherwise have.
As with any zombie outbreak, addressing the problem of zombie properties requires access to the right kind of tools. In the case of The Walking Dead, that might be a shotgun or a machete. In the case of zombie properties, the toolbox is steadily being restocked with new and innovating solutions. So far, the industry hasn’t found the “magic bullet,” but the more attention that is focused on the issue, the more likely true breakthroughs will continue to happen in the fight against urban blight.