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New laws look to combat 'zombie' foreclosures

Mortgage servFaced with ongoing community blight caused by properties abandoned under threat of foreclosure, two states this past week passed laws intended to deal with the problem of these so-called zombie foreclosures. In addition, on June 24, Sen. Bob Menendez, D-N.J., unveiled federal legislation that would provide a set of national regulations to help curb the problem.

Gov. John Kasich on June 28 signed into law Ohio's H.B. 390, which included new fast-track provisions for foreclosures in the state aimed at removing abandoned properties from judicial limbo so they can be repaired and resold more quickly. New York Gov. Andrew M. Cuomo signed that state's bill into law five days earlier, on June 23. The New York bill also includes rules for fast-track foreclosures on vacant properties, but also adds provisions for expediting rehabilitation, repair and improvement of the distressed properties and empowers the state to assist homeowners who are facing foreclosure.

Both Ohio and New York are judicial-foreclosure states, which means foreclosures must go through the courts before being resolved — a process that often can take years. Many homeowners over the past seven years have opted to move out of their homes instead of fighting their foreclosures, leaving lenders and mortgage servicers on the hook. Unable to move these properties quickly through long judicial foreclosure process, some lenders and mortgage servicers walked away from the properties as well, leaving houses in legal limbo.

New Jersey, another judicial foreclosure state, had the highest foreclosure rate in 2015, with some 35,000 new filings. The state also has the most zombie foreclosure properties — around 4,000, according to a recent RealtyTrac report. New York ranks second, with more than 3,300 vacant properties in foreclosure. Ohio comes in at No. 5, with more than 1,000. Florida and Illinois round out the top 5 worst states for zombie foreclosures, at 2,467 and 1,174, respectively.

The high New Jersey numbers prompted Sen. Menendez to reveal his plan to combat the problem on a national level because of the damage zombie foreclosures have caused in his home state. "This legislation stands up for New Jersey’s struggling homeowners and prevents the banks from turning their backs on borrowers, on their neighbors and on the community at large,” Menendez said when he unveiled his plan.

The Menendez bill would hold mortgage servicers responsible for informing borrowers of their rights to remain in their properties during the foreclosure process as well as their responsibilities for paying taxes, assessments and other fees during the process. The proposed federal bill also would require mortgage servicers to make prompt notifications to borrowers and municipalities when they walk away from a foreclosure. It also prohibits servicers from walking away from foreclosures on loans backed by Fannie Mae and Freddie Mac and insured by the Federal Housing Administration (FHA), unless the servicer releases the lien on the property.

The Menendez bill likely will face an uphill battle in a Republican-controlled Senate. Housing experts are unsure, however, if the bill as currently proposed will even do enough to combat the problem of zombie foreclosures. Daren Blomquist, vice president of RealtyTrac, told Scotsman Guide News: "The focus [of the Menendez bill], is consumer protection, which is good, but the bill needs to include a realistic understanding of the obstacles that servicers face to foreclose and make sure that those are removed or at least streamlined."

Laurie Goodman, co-director of the Urban Institute’s Housing Finance Policy Center, also worries about the lack of foreclosure streamlining in the Menendez bill, telling Scotsman Guide News: "The one thing that bothers me about the Menendez law, as it is proposed, is it's making the servicer responsible, but it’s not giving the servicer the benefit of a quick foreclosure." Goodman explained that although the New York law makes servicers responsible for upkeep during foreclosures, it also provides rules for expediting foreclosures on vacant homes, which is a net plus for the servicer.

Blomquist said expedited-foreclosure laws have not always had an impact on the zombie foreclosure problem. Florida and Illinois, and even New Jersey, have already passed laws to help fast track foreclosures on vacant homes in those states. Blomquist believes the Florida law has had a positive impact. "The zombie foreclosure numbers have been coming down in Florida fairly dramatically," he said.

The same can't be said for Illinois or New Jersey, however.

"In talking with folks in Illinois," Blomquist said, "the problem with the law there [was that] it really put a lot of additional requirements on servicers to meet the fast track requirements, so it ended up that hardly any of them used it."

The Ohio law could face similar problems, because servicers must provide a host of evidence that a property is abandoned before courts will grant motions to proceed in an expedited manner.

"At least in the New York law," Blomquist said, "requiring lenders to maintain the home — even while it's still in pre-foreclosure — will provide motivation to not dilly-dally on foreclosing and force lenders to make a decision."

Only time will tell if the Ohio and New York laws will help decrease the number of distressed vacant homes in those states and provide relief to communities deteriorating due to an infestation of zombie properties. According to Goodman, however, doing something is better than doing nothing.

"Having expedited foreclosures in judicial states with very long timelines — there's no reason not to do it." she said. "It just makes all the sense in the world, and I am very glad that Ohio and New York have chosen to do so."

Questions? Contact Will McDermott at (800) 297-6026 or


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