Zombie Mortgages Are "Back"

The housing crash and foreclosure crisis news cycle doesn't move as quickly as the typical 24-hour news cycle, but it does have the same effect of burying relevant concerns when a new scandal or lawsuit breaks.

Case in point: zombie mortgages.

Zombie mortgages are mortgages that are in default, but have yet to enter the foreclosure process. They may also be mortgages that are in the foreclosure process, but stalled due to one of several reasons. Zombie mortgages also include properties where the lender has received its judgment of foreclosure and sale, but then never make it to the auction block.

These types of mortgages represent a significant unknown quantity that threatens the recovery of the housing market, and in turn, the recovery of the overall economy. These properties feed directly into the shadow inventory of homes that are in foreclosure or are foreclosed, yet are not on the market. No matter how long lenders wait to leak the empty homes onto an already depressed market, it continues to be a game of extend and pretend rather than a valid solution.

The way it looks right now, we won't even hit the bottom of the market until 2014. I don't expect to see a recovery until 2016 at the earliest. Naked Capitalism seems to agree with me on this point.

So why are we hearing about zombie mortgages? They're nothing new, and the term was first used as early as December 2010. There could be several reasons. The most likely is that every time a report on the economic recovery is issued, we become aware of the zombie mortgages again. They're the necrotic elephant in the room.

For Illinois home owners facing foreclosure, the problem of zombie mortgages can actually be a benefit. As the time-to-foreclosure increases in Cook County and the other Chicago counties, we may see banks more willing to make deals regarding loan modifications and consent foreclosures. Adding a foreclosure defense attorney into the mix can help increase those timeframes, possibly goading a lender into a settlement.

In any event, if you see zombie mortgages in the news, it's not because they're new or because we're closing in on Halloween. It's just the news cycle combined with the fact that, like a true zombie apocalypse, there's millions of them.

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