Cities and States Combat Zombie Mortgages and Abandoned Properties

David P. Weber
Cities and communities facing a vacant property or zombie mortgage crisis often find themselves in a vicious downward spiral.

Cities and communities facing a vacant property or zombie mortgage crisis often find themselves in a vicious downward spiral.

Alexey Stiop via Shutterstock

Zombie mortgages and abandoned properties often go hand in hand in areas fighting to maintain property values and stable communities. Zombie mortgages are generally understood as aborted foreclosures in which the borrowers are often unaware that they continue to maintain ownership of the encumbered property. The foreclosure process may be halted for a number of reasons such as defects in the mortgage, carrying costs, or increased liability. Abandoned properties are those the borrower has fled, sometimes offering a deed in lieu of foreclosure and other times simply packing up all belongings and moving out. Although the two overlap, they are not identical. As a result, solutions to the two problems share some commonalities but also diverge on occasion. Municipalities are increasingly attempting varied approaches to combat both problems because zombie mortgages and abandoned properties drag down the values of both affected properties and nearby properties, represent potential sources of crime and vandalism, and are painfully obvious reminders of urban blight or decay in their cities.

Among the remedies municipalities have implemented are vacant property registration ordinances (VPROs), land banks, a foreclosure fast track, and dedicated courts and resources. At least one city is even investigating the use of its powers of eminent domain to seize the mortgage itself rather than the property, which is a topic that is beyond the scope of this article. See Robert C. Hockett, It Takes a Village: Municipal Condemnation Proceedings and Public/Private Partnerships for Mortgage Loan Modification, Value Preservation, and Local Economic Recovery, 18 Stan. J.L. Bus. & Fin. 121 (2012).

Admittedly these remedies generally target only the symptoms of the problem because municipalities cannot usually implement broader solutions that can attack the root causes, such as unscrupulous subprime lending practices, major employers leaving the area, and the broader real estate crisis. Yet, by following a selective course of action that targets the worst elements of the abandoned and zombie mortgage crisis, states and municipalities can lessen the harm to the affected cities and neighborhoods. Ultimately, it appears that the best course of action involves a combination of these selected approaches, tailored to the specific issues facing the community.

Vacant Property Registration Ordinances

VPROs are ordinances designed to track vacant properties as well as impose on borrowers or lenders maintenance obligations that are otherwise borne by taxpayers. There are three principal types of VPROs: the classic model, the foreclosure model, and the hybrid model. See, e.g., Yun Sang Lee, Patrick Terranova & Dan Immergluck, New Data on Local Vacant Property Registration Ordinances, 15 Cityscape: A J. of Pol’y Dev. and Res. 259, 260 (2013). The classic model tracks abandoned properties without regard to whether the lender has instituted any foreclosure proceeding against the property. The foreclosure model, by comparison, tracks only properties that are in default and the lender has initiated some action against the property. The hybrid model, as its name indicates, can be triggered by either foreclosure or abandonment.

Once a property is deemed abandoned as determined by ordinance or statute, the reporting obligations and corresponding fee requirements take effect. In many jurisdictions, the fee obligations are on a sliding scale so that properties that have been abandoned for longer periods pay correspondingly higher fees. For example, in Brooklyn Park, Minnesota, there is a registration fee of $400 for homes vacant for up to one year, $1,000 for homes vacant for one to three years, and $3,000 for homes vacant for over three years. See, e.g., City of Brooklyn Ctr. Bldg. & Cnty. Standards, Vacant Building Requirements At-a-Glance (Nov. 2011). The sliding scale fee system helps the municipality recoup some of the costs of maintenance and oversight (where applicable) and encourages a resolution by the lender and borrower to rehabilitate or find a new occupant for the property.

Some VPROs also provide for fines and potential criminal penalties for failure to comply. Lee, Terranova & Immergluck, supra, at 2. These penalties can provide additional incentives for the responsible parties to comply with the property maintenance obligations the city requires.

VPROs have enjoyed fairly wide adoption rates, especially following the financial crisis in the latter half of the 2000s. For more information on VPROs generally, see Richard E. Gottlieb, Margaret J. Rhiew & Brett J. Natarelli, Reckless Abandon: Vacant Property Ordinances Create Legal Uncertainties, 68 Bus. Law. 669 (2013). Part of their popularity is because they benefit multiple constituencies, including the municipality, the affected neighborhoods, and often the borrower, who may not have the resources to maintain the property.

The cost of these benefits is almost always borne by the lenders because they remain interested in protecting the value of their collateral. The Mortgage Bankers Association came out against VPROs in 2013, arguing that the additional costs would reduce lending in the municipalities covered by VPROs and ultimately harm the consumers and communities of those municipalities. But there does not appear to be any data to support or disprove that statement, nor has there been evidence of decreased lending in cities covered by VPROs. 

Although VPROs have been successful in allowing cities to better understand the scope of their vacant property problem, it is not a panacea. One recent blow against VPROs came in spring 2014 when the city of Chicago reached a settlement agreement with the Federal Housing Finance Agency (FHFA).

The FHFA challenged, on preemption grounds, whether the ordinance could compel Fannie Mae and Freddie Mac to comply with its reporting requirements and registration fees. The settlement agreement exempts Fannie Mae and Freddie Mac from the registration fee regime, although the entities did agree to voluntarily register their abandoned properties with the city. This settlement agreement has the potential to undermine any locality’s VPRO insofar as it purports to include properties secured by debt held by Fannie Mae or Freddie Mac. This settlement agreement, therefore, limits the reach of VPROs, although they should still prove useful against private lenders and owners.

Land Banks

Other cities and states have used land banks. A land bank is a governmental (or quasi-governmental) entity that is designed to receive title to a property, usually to rehabilitate it, and thereafter pass clean title on to a subsequent purchaser. Some jurisdictions limit a land bank’s ability to accept properties to only those that are free of title defects or encumbrances, which reduce its scope. Other jurisdictions, such as Atlanta, allow the land bank to discharge outstanding taxes, which greatly facilitates the property’s return as a productive asset of the municipality and community. 

Because many of the properties that come into the hands of land banks do so in a severe state of neglect and disrepair, demolition of the existing structures is often the only feasible solution. Once the existing structure is demolished, the land may be held until the market recovers, sold back to a subsequent purchaser to redevelop, or, in many jurisdictions with stagnant property markets, to contiguous property owners to expand their lot size. U.S. Gov’t Accountability Office, Vacant Properties: Growing Number Increases Communities’ Costs and Challenges, GAO-12-34, 57 (2011).

Although land banks can help cities return a property to the positive side of the tax roll ledger, they can be costly to operate, and there may be confusion over who controls them. In Baltimore, Maryland, officials estimated the cost to demolish its 16,000 vacant properties at $180 million. Id. at 18, 42. Detroit, Michigan, spent $20 million to demolish 4,000 vacant properties in about two years and still had a backlog of 8,000. Id. at 48. These costs are prohibitive for a large municipality, much less a land bank. Therefore, although a land bank can return a property to productive uses in a manner that benefits the neighborhood as well as the municipality, the land bank’s high operation costs limit it to being a partial solution to the zombie mortgage and abandoned property problem.

Foreclosure “Fast Track” Legislation

Some states have enacted a change in foreclosure laws to provide for a foreclosure fast track for qualifying properties. Typically, the requirements for a property to qualify include abandonment, housing code violations, disrepair or neglect, or some combination thereof. The fast-track provisions amend existing foreclosure laws that often provide for lengthy procedures and rights of redemption. In Illinois, for example, a homeowner would typically be excused from a default provided that “cure and payment are made prior to the expiration of 90 days” after receiving a summons in which to bring the mortgage current. 735 Ill. Comp. Stat. 5/15-1602. Also, in a typical Illinois residential foreclosure, the homeowner would have a right of redemption for the later of seven months after the service of summons or publication, or within three months following the entry of the judgment of foreclosure. 735 Ill. Comp. Stat. 5/15-1504(a)(3)(O). If, however, the Illinois court deems the property to be abandoned, the redemption period is limited to 30 days following the judgment for foreclosure. 735 Ill. Comp. Stat. 5/15-1603.

The fast-track mechanism streamlines the foreclosure process by reducing the rights of the homeowner/borrower. The positive side is that with abandoned property, some of the equities on the side of the homeowner that supported longer redemption periods are no longer present. Primarily, the concern of the homeowner being evicted would have been voluntarily eliminated by the homeowner’s act of abandonment. Therefore, lenders can recover the property or take title to the property much more quickly. The extent to which this procedure benefits the neighborhood and community, however, still very much depends on the state of the local housing market. If lenders are simply amassing a larger quantity of abandoned properties and there is no market on which they can realistically resell the properties, the problem has only been shifted rather than solved. Although lenders are indeed likely in a better financial position to take measures to secure the property and provide maintenance, they have little incentive to do so absent other obligations (such as VPROs or enforcement of existing housing code ordinances) if there are few opportunities to resell the property.

Increased Resources /Specialized Responses

Finally, some communities are spending more on dedicated personnel and services to combat the problem at ground level. Some of the measures adopted include specialized housing courts such as those implemented in Cleveland, Ohio, in the 1980s. The Cleveland Housing Court has gone so far as to implement a specialized docket to deal with the problem of abandoned properties and absentee owners/lenders. Cleveland also uses the services of individuals who have been sentenced to community service to help maintain the properties. 

On the West Coast, San Diego, California, created a new position in 1996 to specifically monitor vacant properties and work to restore them to productive use. This position was endowed with the power to issue a notice of abatement, to secure the property, and to charge the city’s costs of securing the property to the owner. Other communities such as Baltimore, Maryland, and Tucson, Arizona, have attempted similar measures, including the creation of a task force to specifically combat the issue of abandoned properties. 

As with the other potential remedies, the question at the municipal level usually devolves into a cost-benefit analysis. All of these measures (including the oversight and handling of the community service providers) require municipal funds from a decreasing municipal budget. In some cities, especially in the Rust Belt, populations have decreased dramatically, and home values have also suffered significantly. When those two problems combine, they leave cities, such as Detroit, Michigan, scrambling to improve the tax base or face drastic budget cuts or even bankruptcy. In addition, as these types of expenditures primarily treat the symptoms of the problem rather than address the core issues, these measures cannot be considered the only solution.


Cities and communities facing a vacant property or zombie mortgage crisis often find themselves in a vicious downward spiral. Once a few properties become vacant, nearby values also begin to dip and the area becomes less desirable for future purchasers. As the blight spreads, overall property values may begin to dip significantly, and the city is then faced with declining property tax revenues (and often other tax revenues, such as sales taxes, because the population base also may begin to decline). Declining tax revenues limit the community’s ability to respond, and the cycle continues. The necessary solution is one that will stem this tide of decline.

Solutions that rehabilitate properties and return them to productive use improve the city’s bottom line and halt or reverse the drag on neighboring property values. When a neighborhood has been stabilized, ideally the population base will begin to return, properties will regain value, and everyone benefits. Although generally limited in their ability to attack the root causes of the real estate crisis, cities can take action to battle the symptoms, stabilize neighborhoods and their tax bases, and halt population loss. To reach this stabilization, cities need to be willing to invest in a multifaceted approach to stave off large potential urban decay. 


David P. Weber

David P. Weber is a professor of law at Creighton University School of Law in Omaha, Nebraska.