'Zombie' properties are on the rise - here's how to kill the trend
Wednesday, February 12, 2014
Crain's Chicago Business
by Dory Rand
As the Chicago area struggles to emerge from the foreclosure crisis, a growing problem poses a serious challenge to the housing recovery: zombie properties.
A property is considered a “zombie property” when a mortgage servicer files for foreclosure and then does not complete the process. Often, the servicer walks away from a property after deciding the cost of proceeding with the foreclosure and maintaining the property until it can be sold will exceed the expected return.
The resulting uncertainty in ownership of the property can be extremely damaging for a community. The borrower may be unaware of the servicer's decision not to pursue the foreclosure and may decide to move out. This can lead to years of abandonment and unpaid fees and taxes on the property.
Not all zombie properties are vacant, however. Even when the borrower stays, because neither the borrower nor the servicer has clear control of the property, neither has a strong incentive to maintain it. These properties, therefore, are likely to be blighted and a source of instability for the surrounding properties.
The Woodstock Institute released a report recently identifying the magnitude of the zombie property problem in Cook County as well as patterns of where these properties are located, based on a random sample of 500 foreclosure filings that had not been resolved within three years.
The results were startling: Approximately 8.7 percent of foreclosure filings (more than 11,700 properties) between 2008 and 2010 in Cook County became zombie properties. An estimated 5,800 of those properties are located in Chicago. If trends continue for foreclosure filings in 2011 and 2012, an estimated 7,200 properties — including nearly 3,200 in Chicago — will become zombie properties by the end of 2015.
To make matters worse, our research found that these properties are disproportionately concentrated in low-income communities and racially homogeneous communities. More than 57 percent of zombie properties are located in census tracts with households in the bottom 40 percent of income, compared with just 22.5 percent of zombie properties in the top 40 percent of income. Properties entering foreclosure in census tracts that are at least 80 percent minority households are 18 percent more likely to become zombie properties than average.
While there have been signs of a general housing recovery, relief in the hardest-hit areas is slow and hard to find. Without a direct response to the problem, restoring these communities will be incredibly difficult.
WHAT CAN BE DONE?
Eliminating uncertainty in property ownership and responsibilities must be a priority. Mortgage servicers should be required to notify borrowers, local governments and courts when they decide to stop pursuing a foreclosure. Too many properties are left in disrepair and potentially dangerous condition simply because the borrower is unaware of the servicer's decision.
Mortgage servicers also should coordinate with local governments and nonprofits to return zombie properties to productive use if they decide not to pursue foreclosure. Nonprofit developers and land banks such as the Cook County Land Bank Authority have the power to redevelop these properties, limiting the negative effects on the surrounding communities.
Municipalities and local governments should be empowered to enforce these policies by passing vacant buildings ordinances that require servicers to maintain homes even before foreclosures are completed. Both the city of Chicago and the Cook County Board of Commissioners passed vacant building ordinance provisions in 2012, giving them a tool to find a responsible party to maintain the property when the owner cannot be found.
Finally, the Cook County Land Bank Authority needs a dedicated funding source. Land banks are a proven tool for repurposing vacant and foreclosed properties. Without adequate and steady funding, however, the land bank will be limited in its capacity to address zombie property problems in Cook County.
While much of the country is emerging from the foreclosure crisis, the Chicago region continues to lag behind. There are proven, clear-cut steps we can take to make sure that every community benefits from the recovery. If we don't act, zombie properties will cannibalize any attempts to rebuild neighborhoods.