This post is part of an ongoing series on foreclosures and their effect on city governments and neighborhoods. The whole series can be found here. Learn what you can do to stop foreclosures in Milwaukee here.
This post explains how zombie foreclosures are created. “Zombie foreclosures” are also known as “bank walkaways,” but locally, the term “zombie foreclosures” is used.* So, for clarity, we will follow local convention and use the term zombie foreclosure.
Zombie foreclosures require special attention because they are the most costly type of foreclosure to city governments, sometimes forcing cities to incur costs of $30,000 or more per foreclosure.
In the previous post in this series, we learned about how the foreclosure process is supposed to work. This involves mortgages, deeds, liens, satisfaction of mortgages, and judgments of foreclosure. This background is necessary to understand how a zombie foreclosure is created, and why they are so toxic. A zombie foreclosure is created when the bank starts, but does not complete, a foreclosure.
A quick recap: Horatio Wells bought a home for $100,000 with a $80,000 mortgage from State Bank. In 2005, Horatio got very sick and could not afford his medical bills. As a result, he fell behind on his mortgage payments. Poor Horatio had not made a single mortgage payment in 6 months. At that point, Horatio had paid off $25,000 of his $80,000 mortgage. Since there was no other way to recover the $55,000 that Horatio still owed them, State Bank decided to take ownership of Horatio’s home in foreclosure. To do so, State Bank went to court and proved that Horatio was behind on his mortgage and had been given enough time to catch up on the payments he missed, so the judge issued a judgment of foreclosure.
Remember–at this point, Horatio is still the owner of the home because the deed for the home still says HORATIO WELLS. Horatio is still the owner until the deed reads STATE BANK. But the Register of Deeds will not change the name on the deed until State Bank brings them the judgment of foreclosure.
Once State Bank brought the Register of Deeds the judgment of foreclosure, HORATIO WELLS was removed from the deed and STATE BANK put in its place. State Bank–now the legal owner of the home–hires a realtor and sells the home for a tidy profit.
Yet in hundreds of homes throughout Milwaukee, banks skipped this last step. They had judgments of foreclosure that they did not bring to the Register of Deeds. This decision turned these homes into zombie foreclosures.
You should be perplexed by this. The entire reason the foreclosure process exists is so that banks can take ownership of homes from people who are not paying their mortgages. Why would a bank go through the trouble and expense of the foreclosure court proceedings, but then decide not to actually take ownership of the home?
To see why, let’s take another simplified example. Let’s consider Horatio’s friend George Walker. George has a situation very similar to Horatio’s. George also bought a home using a mortgage from State Bank. But George’s house is in a less desirable part of Milwaukee. Even though the home itself is just as nice as Horatio’s, it only cost $60,000 because the neighborhood is not very desirable. George also got very sick and–because of his medical bills–was, like Horatio, unable to pay his mortgage for six full months. However, unlike Horatio, who got sick in 2005, George got sick in 2009. Let’s see what happens.
Dawn of the Dead: George’s house turns into a zombie
As we saw in the previous post, when Horatio stopped making mortgage payments, State Bank was very eager to take Horatio’s home. This is because–ordinarily–foreclosures are quite profitable for banks. Remember, Horatio fell ill and was foreclosed on in 2005. In 2005, housing prices were high and there were more people who wanted to buy a house than there were houses for sale. Thus, as soon as State Bank took Horatio’s home and offered it up for sale, many people quickly offered to buy the home for a fair price. State Bank thus only briefly owned the home; they sold it very quickly at a very nice profit.
Now, it’s 2009, and George has gotten sick and is six months behind on his mortgage payments. Because they made so much money foreclosing on Horatio, State Bank is eager to foreclose on George. They go to court and the court issues a judgment of foreclosure.
Back in 2005, State Bank eagerly took the judgment of foreclosure on Horatio’s home to the Register of Deeds and become the legal owner of the home. They were eager because they knew they could quickly make handsome profits by selling Horatio’s home. But 2009 is very different from 2005, and George’s home is in a very different situation than Horatio’s. As we saw, in 2005, it was very easy to sell a home for a high price. But in 2010, housing prices have collapsed. George bought his home for $60,000, but because housing prices have collapsed, State Bank will only be able to sell it for $40,000–if they are even able to find a buyer. For, in 2009, the entire country was mired in a terrible recession. Lots of people lost their jobs or had their pay cut; as a result, there were very few people who were able to buy a home. In fact, in 2009, there were many more homes for sale than there were people looking to buy a home.
So, State Bank holds the judgment of foreclosure for George’s home. But if they actually become owners of George’s home, they will probably not be able to sell it–there just aren’t very many buyers. And that’s a huge problem for State Bank.
Until they can sell it, State Bank will be responsible for paying property taxes on the home, as well as all of the upkeep and security costs. If State Bank owns the home for two years, they will owe two years of property taxes. They will have to hire someone to shovel the snow all winter long for two Wisconsin winters and mow the lawn all spring and summer. They will also have to be sure that nobody breaks into it to strip it of valuable hardwood flooring and copper pipes; they home could lose significant value if it’s not secured. If the roof starts leaking, they will need to pay for a repair; nobody will want to buy a house with a leaky roof.
But since it could take months or even years to sell the home–and because the home is not worth very much to begin with–State Bank begins to think it might not be wise to actually take the judgment of foreclosure to the Register of Deeds. Once they add up the costs–the property taxes, paying someone to shovel snow and mow the lawn, the costs of securing the home–they realize that it would actually be more expensive to take ownership of the home and try to sell it, than to simply do nothing. Remember, this wasn’t the case for Horatio’s home; Horatio’s home was worth more, and in 2005, there were plenty of buyers. But for George’s home, State Bank might lose money if they take ownership and try to sell it; the home is not worth very much due to its location, and it might take years to find a buyer.
So, instead of taking the judgment of foreclosure to the Register of Deeds, State Bank takes a satisfaction of mortgage document to the Register of Deeds. The Register of Deeds removes STATE BANK as a lienholder. GEORGE WALKER is now the only name on the deed; there isn’t even a lien! George now owns the house free and clear!
Of course, all homeowners who still owe money on their home would love for their lender to take a satisfaction of mortgage to the Register of Deeds. This would seem to be quite a turn of luck for George–he went from being behind on his mortgage to owning his home outright, with no debt whatsoever. Remember, only someone with a lien listed on the deed can foreclose; State Bank has thus permanently given up their right to foreclose on George’s house.
The problem is that George has no idea that he still owns the home. Like most people who lose a home through foreclosure, George assumes that once the courts issue a judgment of foreclosure, the bank is officially the owner of the home. Thus, George leaves the home immediately. The last thing he needs is for State Bank to call 911 and have him arrested for trespassing, all of his possessions thrown to the street while he sits in jail.
So George moves out immediately, believing that State Bank now owns his home. His life has been upended by his illness and foreclosure. Little does he know that things are about to get worse.
A week passes, and the grass in George’s yard is getting pretty tall. Of course, George has no idea it’s still his house and he’s still responsible for mowing the lawn. Two more weeks pass, and the grass is so high that neighbors call the City to complain. The City sends someone out to George’s house to mow the lawn, and they increase George’s property taxes by the amount it cost them to mow the lawn. They try to reach him to let him know, but the only address they have for him is the home where they just mowed the lawn, and he obviously can’t be reached there. The city mows George’s overgrown lawn every few weeks, and each time they do, George owes the city more and more money.
December arrives and a blizzard hits. At least George won’t get any more bills for mowing the lawn. But the neighbors call the City to complain that the snow hasn’t been shoveled. The City sends someone out to shovel, and bills George again. Soon, it’s January. Property taxes are due. George doesn’t know he owes any property taxes, and so they go unpaid. Because nobody paid the property taxes on George’s house, the City has less money to fund schools, garbage collection, and other city services.
Months pass; since nobody is living in the home, the home becomes infested with pests. If someone was living there, they would set up mouse traps, or even hire an exterminator if things got bad enough. But nobody ever sets foot inside–that is, until George’s house is so filthy that neighbors call the City to complain. The City sends a building inspector over, who finds that the home has deteriorated so much that it violates City of Milwaukee building codes; they fine George for these violations. Eventually, the City declares the home abandoned and boards up all the windows and doors; they add this bill to George’s property tax bill as well. Months or years later, termites have taken up residence, and the house is starting to badly deteriorate. Neighbors call again to complain about George’s filthy home. The City sends another inspector, who finds that the termite damage is so severe that the home cannot be repaired. The City must pay $15,700 to demolish George’s home; they add this to George’s property tax bill.
By now, George owes the city more than $20,000. He has not paid his property taxes for several years. All this time, the City has been mowing his lawn and shoveling the snow. George owes lots of money for fines for building code violations, and for the City boarding up the windows and doors. And ultimately, he owes the City for the cost of the demolition. Eventually, the City sends a police officer to track George down–he’s now living with his parents since he lost everything due to his sickness and foreclosure–and serve him notice that he owes the City over $20,000.
George is incredulous. “I can’t owe the City! The bank owns that house! They took it from me in foreclosure years ago!”
But George doesn’t realize that State Bank never took the judgment of foreclosure to the Register of Deeds; he has thus been the owner all these years. George suddenly has a very serious problem to deal with; he owes the city a massive bill that he cannot afford.
The City will try to collect this money from George, but ultimately, they will not be able to recover any of it. Remember, George lost everything due to his illness and foreclosure, so there is nothing for the City to take. The City will have to give up and write off George’s massive bill. Nevertheless, this will ordeal will give George an ulcer.
Meanwhile, State Bank will not suffer any consequences for all the trouble they caused. They threw George out of a home that he actually owned. They let a home become a disgusting eyesore; nobody wants to live on that block anymore because the home is falling apart, is full of pests, and could even become a harbor for criminal activity. The home is so disgusting that all the homeowners living near the home see their home values fall. The unexpected bill from the City creates a new ordeal for George to deal with, even though his life has already been upended by illness and foreclosure. And the City ultimately is responsible for paying tens of thousands of dollars–all because State Bank started, but did not complete, the foreclosure process.
A brief reprieve from zombie foreclosures
In 2015, a unanimous decision by the Wisconsin Supreme Court agreed that the zombie foreclosure problem was out of control, that banks were abdicating their responsibility to care for homes that they themselves had foreclosed on, and passing extraordinary costs onto City governments and ordinary people. The Supreme Court ruled that banks must decide within five weeks whether to they will take the judgment of foreclosure to the Register of Deeds. In other words, the homeowner would know within five weeks if the bank was taking ownership of the home, or if she was going to remain the owner. In just five weeks, the home would not be vacant long enough to deteriorate to the point where it would have building code violations, or need to be demolished, as George’s eventually did. Though incredible damage had already been done to Milwaukee by then, this decision promised to end the practice of zombie foreclosures and their tremendous cost to society.
However, in 2016, Governor Walker signed into law a bill overturning this unanimous decision, extending the five-week time period to one year. While one year is certainly better than what had been the process earlier, where the bank can keep a home as a zombie foreclosure indefinitely, an unoccupied home can still badly deteriorate in one year.
By now, it should be clear just how unfair zombie foreclosures are. First, zombie foreclosures really only occur in the poorest neighborhoods. By and large, only homes with low property values become zombies. In other words, the disproportionate victims of zombie foreclosures are neighborhoods with the least resources to cope with their damaging effects. The homes themselves often end up as blight. At best, zombie homes are eyesores. Who would want to live on the same block as a home that has broken windows, a yard overrun with weeds, and a slowly caving in roof? At worst, zombie foreclosures harbor criminal activity, and zombie foreclosures often catch fire, creating a danger to neighbors and Milwaukee’s firefighters. This blight occurs in neighborhoods that are already disinvested, already have problems with criminal activity, and already have safety concerns. Zombie foreclosures impose costs on those least able to bear them.
Second, zombie foreclosures are grossly unfair to the people who lose their homes. Remember, George lost everything in the foreclosure. His life’s savings were tied up in his home, and are now gone. George was shocked when he found out that–despite being foreclosed on–he still owned the home, and he owed the city over $20,000.
Of course, all of this could have been avoided if George simply refused to leave the home until the deed was changed. The home only became a problem when it deteriorated; and the home only deteriorated because nobody was living in it. Had George not moved out, all of this trouble–trouble for the neighborhood, trouble for George, and massive expense for the City–could have been avoided. But is this realistic? Could George have stayed?
Absolutely not. Remember, the instant his name is removed from the deed, State Bank would have the right to call 911 and have George arrested for trespassing. Then, as George sat in jail, all of his possessions would be thrown to the curb. George cannot live in a home where he could be thrown out at any moment; all State Bank needs to do is take the judgment of foreclosure to the Register of Deeds, and George’s life is again upended.
So George can’t stay in the home. Is there something else George could do to avoid some of the problems? Could George mow the lawn to avoid getting charged by the City? Should he replace the roof if it needs to be replaced to avoid building code fines from the City? Actually, this doesn’t make any sense, either. Why should George take care of the home if he could lose it at any time? If George responsibly repairs and maintains the home, that only makes it more likely that State Bank will seize the home. George should not take care of a home that he could lose at any moment.
Finally, zombie foreclosures are grossly unfair to the entire city and everyone in it. The average cost for the City to demolish a home is $15,700. That cost, as well as the other costs–from building inspectors to unpaid property taxes, the costs of fire suppression, or mowing the lawn–must be paid for by ordinary taxpayers. One study found that the direct costs of zombie foreclosures to city governments can top $34,000. State Bank exploited a loophole to create a situation where the home was sure to be abandoned, and abandoned homes create terrible problems. Yet State Bank doesn’t have to pay for any of the problems stemming from the situation they created.
Without a change to Wisconsin state law, the City is powerless to force banks to take responsibility for homes after foreclosing. We need to step up and prevent these foreclosures from ever happening in the first place. That’s why your donation is so important; a small investment to prevent a foreclosure today can prevent extraordinary costs in the future. Learn about how we use small donations to prevent foreclosures.
In future posts, we will look at some of the costs of zombie foreclosures. For example, how much does fire suppression or demolition cost? Does crime rise around zombie foreclosures?
*The local press and even local real estate lawyers use the term “zombie foreclosures.” Here is a blog post from the respected law firm Schober, Schober & Mitchell about the “Zombie Property Apocalypse.”
Image: A foreclosed, “mothballed” home in Benton Harbor, Michigan. Flickr / Kevin Dooley