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Are Zombie House Laws Having an Impact on the Mortgage Industry?

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We fear zombies because they sit between two distinct worlds, neither living nor dead. But while undead people are thankfully limited to pop culture, plenty of homes are neither living nor dead, and disputes over how to free them may already be affecting the mortgage industry.

Aim For The Head

How do homes become zombies? The foreclosure process is a long and difficult one, as lenders and homeowners have to take several steps before a home is repossessed by a financial institution, including attempting a loan modification, mediating disputes, and of course resorting to the legal system.

As a result, there are approximately 1.5 million single-family homes and condos in the foreclosure process with no resident. And like a zombie, the longer they lurch through the legal system, the more off-putting they become, attracting pests and trash, falling behind on maintenance, and dragging down local home values.

There’s a solution; require somebody, anybody, to keep the homes in good repair. The problem, of course, is just who that “somebody” is.

Fight Or Flight

The state of New York, at the end of 2019, took steps to resolve that question with the Zombie Property Remediation Act. It essentially gives municipalities tools to speed up the process, compelling the lender to either foreclose on a property or discharge their obligation and give it to local government. While the overall time limits vary, generally banks have three months to make a decision one way or the other.

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So what will lenders do, and will these laws spread elsewhere? Both are good questions. Foreclosed properties are between two worlds in another respect: They have outsized impacts in terms of raw numbers, with a million households going into foreclosure every year… but that represents just 0.5% of all homes. New York City, for example, has approximately 2,000 zombie properties, out of 761,000 residential properties in the city proper, and averages 3,000 first-time foreclosures a year. So only a tiny fraction of homes even become zombies in the first place.

It’s simply too soon to tell for most lenders. It looks, so far, that small lenders are facing more problems than larger ones, which may potentially force those lenders out of the market. It may also drive down their appetite for risk, limiting the number of lenders homebuyers below a certain credit score can tap into.

Most states seem to be taking a wait-and-see approach to New York’s laws, or are making moves with broader impacts. Minneapolis, for example, is doing away with single-family zoning altogether, and other municipalities are revising their zoning laws to limit the number of vehicles and to encourage building close to transit stops.

That said, however, the only good place for a zombie home is away from a balance sheet. Once litigation costs and taxes are factored in, they’re often just as unpleasant as their namesake. By the time we know the impact of these laws on lenders, lenders should already have put them in the ground.