New Hope for ‘Zombie’ Foreclosures in New Jersey

foreclosure sign2

Foreclosures are still being filed at a staggering rate in New Jersey, and Atlantic City has the highest foreclosure rate in the country among cities of comparable size. Foreclosures occur when financially distressed homeowners become unable to pay their mortgage bill, and their bank or lender repossesses the home, effectively evicting the homeowner.

Since the number of NJ homes in foreclosure is currently so astronomically high, the court system has become bogged down and way behind schedule. In fact, New Jersey presently holds the title for the state with the longest foreclosure timeline, coming in at an average length of 1,103 days. That comes out to just over three years from filing date to eviction and sale of the home.

When faced with an impending foreclosure, some homeowners hit the panic button. Without knowing much about  foreclosure timelines, these homeowners quickly pack up and move out, likely feeling that they’d rather leave willingly than be evicted by their lender.

These abandoned properties are then left empty and in disrepair for the duration of the foreclosure process. Their owners are gone but they are not owned by the lender yet, either. These empty homes are referred to as “zombie foreclosures” because they’re seen as a threat to the safety of their neighborhood, much like the mindless undead creatures in horror movies. Zombie homes also threaten the vigor of the surrounding housing market. Squatters and/or drug dealers frequently occupy these empty homes, making the area seem seedy and undesirable to potential new residents.

The real horror involving zombie foreclosures affects the home’s original owner who packed up and left town. Under the impression that their lender would follow through with foreclosure, many homeowners wash their hands of the problem, find a more affordable place to live, and move on with their lives without giving their former home any more thought.

Unfortunately, there are circumstances under which a bank or lender simply decides not to follow through with a foreclosure. Oftentimes, this occurs in lower income areas in which lenders don’t see any real benefit in owning property. Rather than become responsible for the home’s taxes and repair costs (particularly if there are squatters involved), a lender may simply cancel the foreclosure altogether.

How Zombie Foreclosures are Haunting their Former Owners

When an abandoned property drops out of the foreclosure process, guess whose name is still on the title? That’s right – unbeknownst to them, those homeowners who fled as soon as foreclosure was mentioned will remain legally responsible for the home if foreclosure never occurs. This can be literally devastating to people who haven’t thought about their former home in possibly years.

When a foreclosure is halted, for whatever reason, the property’s unpaid debts (property taxes, home association dues, property maintenance) default back to the homeowner. As these debts have often been compounding interest for years, the ultimate cost to the homeowner (and his credit score) can be disastrous.

How the U.S. Senate is Trying to Fix the Problem

The U.S. Senate Subcommittee on Housing, Transportation and Community Development wants to help. Subcommittee member Senator Robert Menendez (D-NJ) recently introduced a bill called the Preserving American Homeownership Act. The Act’s main goal is to help underwater homeowners stay in their homes rather than face foreclosure and the financial destruction that comes along with it.

Menendez’s proposal aims to help both homeowners and lenders alike. The best way to help distressed homeowners is by reducing their mortgage principal. Historically, lenders have been hesitant to reduce principals out of fear of losing too much money. The Preserving American Homeownership Act proposes that banks offer a reduced principal to those homeowners that qualify. In return, the bank will receive a fixed amount (up to 50%) of the home’s increased value when it is refinanced or sold in the future.

In order to be eligible for the program, homeowners must continue to make their new, modified payments on time every month. Failure to make timely payments going forward will disqualify them from receiving a reduced principal. This legislation offers a great deal of hope to struggling borrowers, their lenders, and the New Jersey real estate market.

Image credit: T.A. Bain

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5 Responses to New Hope for ‘Zombie’ Foreclosures in New Jersey

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