Monday, January 14, 2013

Strategic Default Monitor Alert: Zombie Foreclosures - When Banks Walk Away

It appears that banks have decided to strategically default by walking away from a property. Homeowners need to understand the potential risks when a bank decides to abandon foreclosure proceedings against a property.

We routinely discuss the primary risks of a strategic default. The primary risks of a strategic default are:
  1. Deficiency debt can lead to a deficiency judgment. 
  2. A property can be lost in a foreclosure action. 
  3. Lower credit score. 
  4. Exposure to aggressive debt collection tactics. 
  5. Personal liability for unpaid taxes, utilities, or other property related expenses. 
  6. Government action against homeowners that strategically default. For example Fannie Mae may not allow home loans to individuals who strategically default. Recently it was reported that the Federal Housing Finance Agency ("FHFA") intends to aggressively go after individuals who strategically default on a government insured home loan. However a FHFA official released a statement claiming that it will not be the policy to seek out people who strategically default. The bottom line: The government has its eye out on strategic defaulters. 

We have posted a few excerpts from an informative article about homeowner's facing personal financial risks for unpaid taxes, utilities, and/or other property related expenses and/or fines. The article entitled: Zombie foreclosures terrorize ex-homeowners is a story about "thousands of homeowners [who] are finding themselves legally liable for houses they didn't know they still owned after banks decided it wasn't worth their while to complete foreclosures on them. With impunity, banks have been walking away from foreclosures much the way some homeowners walked away from their mortgages when the housing market first crashed."

Theses owners "have had their wages garnished, their credit destroyed and their tax refunds seized. They've opened their mail to find bills for back taxes, graffiti-scrubbing services, demolition crews, trash removal, gutter repair, exterior cleaning and lawn clipping. At their front doors they've encountered bailiffs brandishing summonses to appear in court. [i]n some cities, people with zombie titles can be sentenced to probation - with the threat of jail if they don't bring their houses into compliance."

Keep in mind that the lender's motivation is strictly financial. The lender received financial benefits for not completing a foreclosure proceeding. "By walking away, banks can at least reap the insurance, tax and accounting benefits from documenting the loss — without having to take on any of the costs and responsibilities of ownership, according to a 2010 Federal Reserve paper. A walk-away also enables them to 'sell the unpaid debt to debt collectors, sometimes noting to the court that the loan has been charged off,'" Read More at

Also Read When Banks Walk Away Homeowners Don't Always Win

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