Rise in Zombie Foreclosures Points to Last Wave of ‘Strategic Default’
The share of ‘zombie foreclosures’ – homes in the foreclosure process where owners have vacated before the bank has repossessed the property – rose to 25 percent of all active foreclosures as of the end of January, according to foreclosure data firm RealtyTrac.
The RealtyTrac Q1 2015 Zombie Foreclosure Report found that although the total number of such defaults fell 6 percent to 142,462 from the previous year, the share of zombie foreclosures rose 21 percent from the same time in 2014. However, this increase could actually be good for the housing market.
“In states with a bloated foreclosure process, the increase in zombie foreclosures is actually a good sign that banks and courts are finally moving forward with a resolution on these properties that may have been sitting in foreclosure limbo for years,” commented RealtyTrac vice president Daren Blomquist. “In many markets there is plenty of demand from buyers and investors to snatch up these distressed properties as soon as they become available to purchase.”
Blomquist was referring to states with ‘judicial review’ where every foreclosure must be reviewed by a judge before completion. Getting all those foreclosures through the court system has created serious backlogs in many states. And as home prices have risen dramatically over the past year in much of the country, many banks are more interested in repossessing defaulted properties to make a profit on the sale rather than work with homeowners to keep them in their homes.
With fewer mortgage modification options, some homeowners have chosen to strategically default –vacate the property and defaulting on their home loans on purpose – in order to move on faster with their own financial lives. That was a major problem during the early days of the mortgage meltdown, leaving entire neighborhoods with blighted, vandalized properties and lower overall home values. The strategic defaults seemed to drop off in the past few years, but we may now be seeing the last wave as states finish working through their foreclosure backlogs.
Florida topped the list of states with high zombie foreclosure numbers. There were 35,903 during the 2015 first quarter and while that was down 35 percent from 54,908 properties a year ago, it still represented 26 percent of all Florida foreclosures and far outpaced any other states numbers.
New Jersey was a distant second with 17,983 zombie foreclosure, a 109 percent increase over last year. The state with the third highest number of vacated foreclosures was New York with 16,777, a 54 percent increase from the year before. Illinois was fourth with 9,358 zombie foreclosure. All of the top four states use the judicial review process.
The rest of the top ten was rounded out by California (7,370 zombie foreclosures), Ohio (7,360), Indiana (5,217), Pennsylvania (4,937), Maryland (3,363) and North Carolina (3,177).
While it is promising that we seem to be in the last stages of the foreclosure crisis, the rising percentage of zombie defaults does mean that many neighborhoods will continue to suffer for the next year or two from the increase in vacant properties. With home prices continuing to rise, homeowners facing foreclosure should explore the possibility of selling before jumping straight to default.