Following the financial crisis, many home mortgage borrowers found themselves living in properties encumbered by debt that far exceeded their value. The result was an increase in mortgage default rates, followed by a wave of foreclosures as lenders scrambled to minimize the financial damage to their investments. From the wreckage, a new creature emerged that threatened to devastate borrowers who believed that foreclosure was their chance for a fresh start: the zombie mortgage. With a spike in lenders failing or declining to foreclose on properties, borrowers were unexpectedly facing an unwanted burden of homeownership that would cause them and their communities severe distress. As states and courts began to fight back, the number of zombie mortgages declined. Yet to this day, zombies can be found across the country and the risk that more will rise is quite real. This Note argues that a potential solution is for state legislatures to enact forced vesting provisions. Specifically, this Note evaluates the potential effect of such laws through a law and economics lens and concludes that such provisions would be beneficial.
After a thorough review of the bankruptcy case law regarding the forced vesting of surrendered real estate in the name of the mortgage holder (which the author oddly enough fails to refer to as the perhaps too hubristic "Baker Plan"), this note then proceeds to evaluate how States should enact legislation to allow the forced vesting. Looking at this through a Law and Economics lense, the author offers ways that the home owner/mortgagor relationship could be re-balanced to either allow the forced vesting or shifting of costs and obligations, in an attempt to foster better negotiations between the parties. For example, this suggests that for recourse mortgages, state law could be changed such that the refusal to accept title from a debtor would convert the mortgage into a non-recourse note. The failing of this, is that a homeowner (particularly those that are surrendering their residence) can usually file a bankruptcy and discharge that obligation. Alternatively, the author suggests that local governmental entities could be allowed to foreclose. This is, at least in North Carolina, already the case, as real property taxes "prime" all other liens, taking seniority. Unfortunately, this did not always lead county tax authorities to foreclose.
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