Zombie Mortgages- What Can The Association Do To Combat Them?

First, what is a zombie mortgage? We refer to zombie mortgages as those mortgages that are in default (i.e. the owner is not paying the mortgage), where the lender either chooses not to pursue a foreclosure or does pursue foreclosure, but either dismisses the case or does not set a sheriff’s sale.

How long will a bank wait before filing foreclosure against an owner who is in default? Maybe 3 months, maybe 10 years, maybe never. The problem for the Association is that while this zombie mortgage is looming on the property, the owner is not paying Association fees, and the bank has no responsibility to pay maintenance fees or maintain the property in good condition.

What can the Association do to combat issues with zombie mortgages that leave a property vacant for years? Unfortunately, there is no easy or

catch-all solution for associations who are faced with the issue of inactive lenders. However, collectively, a few efforts may reduce the time a property remains vacant and may lessen the financial burden on the Association.

Communicate maintenance fee responsibility to the titled owner. Many owners who do not understand the foreclosure process think that by the bank simply filing foreclosure, they are absolved of any further obligations for the property. Some even send their keys to the bank, thinking that this will transfer responsibility. Make it clear to the owner has a pending foreclosure that they WILL pay maintenance fees for as long as the property is titled to them and the Association WILL seek a personal judgment against them if they do not pay.

Encourage the owner to try to sell the property via short sale or try to negotiate a deed-in-lieu of foreclosure with the lender.

While the process of trying to complete a short sale or deed-in-lieu of foreclosure is often a time-consuming and difficult notion, the bank that does not want to foreclose may take back the property if they do not have to file a foreclosure. When a lender files foreclosure, if may cost upwards of $20,000. If the property is worth less than that, it will be cheaper for the bank to just let the property sit.

The Association should take action sooner rather than later.

The longer the Association waits to file foreclosure, the more can go wrong. While the property is sitting vacant, not only do maintenance issues become a problem, but also the Association has a growing unpaid receivables balance. If and when the Association chooses to file foreclosure; the delinquent property taxes may ward off potential bidders at sheriff’s sales (generally, the winning bidder at a sheriff’s sale must pay all past due property taxes, even if the taxes exceed the bid price.) While waiting a year or two to file foreclosure is probably not going to be detrimental, waiting five years from the time of abandonment may be an extreme hardship for the Association.

If the Association is having trouble selling properties at sheriff’s sales, the Board can make concessions.

We have had a few properties that will simply not sell at sheriff’s sale due to the high amount of property taxes owed. If this is the case, the Association may make agreements with the investors to forgive so many months maintenance fees in exchange for purchasing the property and paying back taxes. This will, at the very least, stop the bleeding.

Don’t be afraid to contact the lender with upkeep violations or even your municipality.

If there are absentee owners and the bank is refusing to foreclose, don’t hesitate to contact the bank. Often, the property is on their radar. Better yet, contact your local municipality. If housing code violations are found, they will be quick to bring a case against the owner, and the penalty for failure to fix the violations may result in fines and/or jail time.

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