Zombie Mortgages, Real Estate, and the Fallout for the Survivors

Abstract

Part I of this Article briefly explains the context and scope of the problem of zombie mortgages – mortgages that are in default but for which the lender refuses or fails to foreclose. Zombie mortgages saddle the record owner with ongoing tax and maintenance obligations which they may not be able to escape. Zombie properties are problematic for the affected homeowners, but in many cases they are equally problematic for other individuals residing in the same neighborhood, the lenders and servicers, and the relevant municipalities who will have to face issues of negligence, blight and vandalism related to vacant properties. Part I analyzes current municipal approaches to dealing with the problem, primarily through vacant property registration ordinances (VPROs). Part II examines cases from both municipal-driven litigation as well as consumer-driven litigation where zombie debt has been legally extinguished. Part II also examines several bankruptcy decisions that potentially lead to an avenue of relief for the owners of the affected properties. Part III proposes two new unique ordinances that cities could use to combat the problem, highlights owner-based solutions in bankruptcy, and mentions other attempts that have been tried in erasing zombie mortgages. This article concludes that a compromise solution that involves the municipalities, lenders and owners is the best route to ease the nationwide problems associated with zombie mortgages.