Amidst the Walking Dead: Judicial and Nonjudicial Approaches for Eradicating Zombie Mortgages
| Publication year | 2016 |
Amidst the Walking Dead: Judicial and Nonjudicial Approaches for Eradicating Zombie Mortgages
Andrea Clark
The collapse of the residential housing market in 2007 brought with it a wave of foreclosures. Subprime borrowers, who were once elated by loans they secured from lenders, suddenly found themselves strangled by the predatory terms of their newfound loans and ultimately became unable to pay their outstanding loan balance. Amidst a growing number of residential foreclosures, lenders discovered the financial downside of foreclosing on residential properties—though this realization often surfaced after the foreclosure proceeding had commenced—and began to delay, or halt, foreclosure sales altogether. These purposeful maneuvers by lenders resulted in borrowers' continued legal liability for a residential property, a property which borrowers believed they had lost as a result of the lender's foreclosure; in other words, a "zombie mortgage."
This Comment analyzes the different circumstances under which lenders can foster the creation of zombie mortgages. Particularly, this Comment focuses on stalled and incomplete residential foreclosure sales and failures to execute deeds of sale, tactics which serve to maintain legal liability of the mortgaged property on a borrower. Notwithstanding a lender's right to foreclose on residential property to satisfy the obligations that it is owed under a promissory note, this Comment argues that strategic delays in completing a foreclosure sale entitle state courts and legislatures to either (1) force a lender to complete a sale or (2) divest a lender from both its right to foreclose and its security interest. Though some other solutions for zombie mortgages have been proposed, this Comment urges courts and legislatures to look outside criminal sanctions and nuisance abatement actions when developing strategies to eradicate zombie mortgages. Through judicial and legislative intervention, lenders would be incentivized to complete the foreclosure proceeding, or risk losing their security interests in the mortgaged property.
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Like many homeowners in the United States, Joseph Keller fell behind on his mortgage payments and found himself subject to a foreclosure judgment.1 Once Keller received notice of the foreclosure sale, he and his family packed up their belongings and moved out, assuming that they would never "have anything to do with the house again."2 Unfortunately, Keller was wrong.
About two months after Keller's receipt of the auction notice, "[his] bank filed to dismiss the foreclosure judgment and the order of sale."3 The result was a "zombie mortgage"—a property that remained in Keller's name as if the foreclosure proceedings had never started.4 Keller was also legally liable for back taxes, sewer fees, waste removal, and the overall maintenance of a decrepit property that he had not occupied in years and thought was no longer his own.5 Though abandoned foreclosures were once rare, the creation of zombie mortgages—like the one held by Keller—has been increasingly replicated in several cities across the nation, particularly in cities struggling economically after the downfall of the housing market.6
Despite the fact that lenders have several options to avoid foreclosure, including home retention workouts or helping borrowers refinance their loans, many of them choose to begin foreclosure proceedings while they are still negotiating with borrowers.7 Throughout this process, lenders engage in an
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equity analysis "to decide whether to foreclose on a loan or conduct a charge-off in lieu of a foreclosure."8
Whether it was a judicial or a nonjudicial foreclosure, lenders increasingly began to delay the foreclosure proceedings after either obtaining a judgment from the court for the sale of the property, after setting a date for the auction of the same, or even after the auction occurred.9 By ceasing all additional steps to complete the foreclosure proceeding, lenders attempted—and continue to attempt—to bypass legal liability for maintaining the property while retaining the ability to foreclose on the same mortgaged property in the future.10 More importantly, title to such property remained with the borrower given that the mortgaged property was never actually sold.11
Though many scholars have proposed mediation, nuisance abatement, and criminal sanction strategies,12 these proposed solutions have not been sufficient on their own to eradicate zombie mortgages in the residential real estate arena.13 Therein, the solution to the zombie mortgage crisis lies in analyzing a lender's right to foreclose and subsequently using judicial and legislative approaches to transform that right into a legal obligation to finalize the foreclosure sale it voluntarily commenced.
In Part I, this Comment presents a brief explanation of judicial and nonjudicial foreclosure proceedings. It also presents the definition of zombie mortgage, which will be used throughout this Comment. Part II then analyzes the rights of the lender, both when the borrower is in possession of the mortgaged property and when the property is unoccupied. Part II concludes by exploring the circumstances under which a lender's rights can become obligations.
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Next, Part III outlines the foundation that will underpin the solutions proposed in this Comment. Though a lender has a right to foreclose on the mortgaged property to satisfy the sum owed under a promissory note, purposeful delays in conducting such foreclosure sale could trigger judicial use of equitable discretion. Part III also discusses current legislative loopholes that permit lenders to delay the foreclosure sale indefinitely. This Part demonstrates that state judicial and legislative branches can interfere with a lender's right to foreclose if such lender's exercise of the right has been unduly delayed.
Lastly, Part IV draws from the judicial and legislative intervention analysis discussed in Part III to recommend solutions for the zombie mortgage crisis. Though different solutions are presented for judicial and nonjudicial foreclosure states, the underlying goal of eradicating zombie mortgages can be accomplished in both types of jurisdictions.
Zombie mortgages evolved from three primary sources: the subprime lending crisis, lenders' subsequent discoveries that foreclosures on residential mortgages would often be more costly than the value of the property, and lenders' desires to avoid legal ownership and liability of the property.14 This Part explains the differences between judicial and nonjudicial foreclosures and the underlying characteristics that subject them to different zombie mortgage solutions. This Part then defines the term zombie mortgage for purposes of this Comment and identifies the stages during which a zombie mortgage can arise.
A. Judicial and Nonjudicial Foreclosures
A zombie mortgage can exist in both judicial and nonjudicial foreclosure states.15 A judicial foreclosure jurisdiction is one in which a lender must go through the court system to foreclose on a residential property.16 Such a lender is usually required to give a borrower notice before filing the foreclosure complaint.17 After a borrower has had time to respond, the lender can serve the
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complaint.18 If the borrower does not respond to the complaint, then "the [presiding] court authorizes a foreclosure sale."19 In the event a borrower does file a response to the complaint, the case proceeds to trial.20 Nevertheless, most judicial foreclosures of residential mortgages are "not contested and result in default judgments against the homeowner" because courts are only obligated to look at the sufficiency of a lender's filings.21
Alternatively, a nonjudicial foreclosure jurisdiction—also referred to as a power-of-sale foreclosure jurisdiction22 —is one in which a lender only needs to comply with notice and advertisement requirements before it can auction the property for sale.23 The lender does not need the permission of the court to commence the sale. In nonjudicial foreclosure states, the burden is on the borrower to commence judicial action if it wishes to stop the sale.24
Approximately thirty-three states and the District of Columbia are classified as predominantly nonjudicial, while seventeen states are classified as predominantly judicial.25 In all states that permit nonjudicial foreclosure, a
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lender "always has the option of pursuing foreclosure through a judicial process."26
B. Understanding What a Zombie Mortgage Is and When One Occurs
The term "zombie mortgage" refers to a mortgage on a residential property for which enforcement of foreclosure proceedings were commenced but never finalized—plus the externalities such an action creates.27 Although zombie mortgages produce numerous problems, this Comment focuses on the uncertainty surrounding ownership of the property in the period of time after foreclosure proceedings have commenced and after the lender has ceased enforcing its rights to the security interest. As a result of these initiated foreclosure actions, zombie mortgage victims believe they have lost ownership of the mortgaged property, but they are in fact still the legal owners of record several years later.
Accordingly, zombie mortgages result from a series of lender-created scenarios, all which serve to maintain legal ownership and liability of the property in a borrower.28 In judicial foreclosure jurisdictions, a zombie mortgage exists in two circumstances: (1) when a lender commences a foreclosure sale by filing a foreclosure action with a court, gets a judgment in its favor granting the foreclosure sale, but then fails to conduct the sale; or (2) when a lender conducts the foreclosure sale but elects not to execute or
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record its foreclosure deed after it is the...
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