CFPB targets 'zombie' foreclosures after Reuters report
Thu Mar 13, 2014 12:13pm EDT
By Michelle Conlin
(Reuters) - The Consumer Financial Protection Bureau is probing "zombie" foreclosures, a phenomenon first revealed by Reuters last year.
Zombie foreclosures result when banks begin a foreclosure -even going so far as to send the homeowners a foreclosure notice - but then abandon it, failing to alert the homeowners, who have often moved out, that they are still responsible for their vacant properties.
Borrowers, who don't realize they still own their homes, are then left responsible for mortgage debt, taxes and upkeep.
"The CFPB is beginning to look very closely at abandoned properties and zombie foreclosures," said Laurie Maggiano, the CFPB's servicing and secondary markets program manager, at a Federal Reserve Bank of Cleveland conference on Tuesday.
"There is direct borrower harm if a borrower believes a foreclosure on their property has been conducted and they are no longer responsible, and months or years later find out that they are, that there was never a foreclosure and they have large financial responsibilities that they never knew about."
The Reuters story revealed that thousands of borrowers across the country were the unwitting owners of zombie homes. Many were on the hook for thousands of dollars of mortgage debt, code violations and municipal services like water and trash.
The CFPB said that consumer advocates had repeatedly asked the agency to address the problem, saying that mortgage servicers were not complying with disclosure requirements to borrowers and anti-blight provisions that require them to release liens on properties instead of leaving them in limbo.
The CFPB also said that it has joined a task force, led by several industries, to identify the hundreds of thousands of homes that have become zombie foreclosures.
Zombie foreclosures usually occur on low-value properties that weren't worth the banks' time to foreclose upon. Rather, the banks charged the houses off. The Reuters report found that, with impunity, the banks have been walking away from foreclosures much the way some homeowners walked away from their mortgages when the housing market first crashed.
Since 2006, 10 million homes have fallen into foreclosure, according to RealtyTrac, a number that in earlier, more stable times would have taken nearly two decades to reach. Of those foreclosures, more than 2 million have never come out. Some may be occupied by owners who have been living gratis. Others have been caught up in what is now known as the robo-signing scandal, when banks spun out reams of fraudulent documents to foreclose quickly on as many homeowners as they could. The rest are zombie foreclosures.
Though banks and servicers are not technically required to communicate with borrowers about lien releases or charge-offs, an obscure provision of the Truth-in-Lending Act requires that servicers send periodic statements each month to borrowers who have liability for delinquent mortgage debt, the CFPB said.
That provision now is "pushing servicers to release the borrower from liability for the debt," Maggiano said. "So, it's not a technical requirement in our regulations…but we consider that to be a responsible communication to borrowers."
The CFPB said it had ideas to help resolve the problem such as creating a national definition of "abandonment", hastening the foreclosure process so vacant homes can more quickly be transferred to potential owners and non-profits, and creating a national registry of zombie properties.
(Reporting By Michelle Conlin; Editing by Stephen Powell)