On a quiet, leafy block in East Orange, Sen. Robert Menendez (D-NJ) stood in front of a rambling, century-old home and talked about zombies.
In this case, he meant the house, a "zombie foreclosure," like others across the state and nation. For a time, it was occupied by squatters. But like many other foreclosed homes, it was abandoned by owners, financial institutions and investors, all of whom have walked away.
"New Jersey continues to have the highest rate of foreclosures in the country, and it's not just in urban areas like East Orange," Menendez said, as he announced a new legislative attempt to combat the problem from the federal level.
The results of the foreclosures, he said, have been depressed home prices, a struggling economy, increased household debt, and less revenue for municipalities even as abandoned buildings impose higher costs for public health and safety.
In many cases, Menendez said, residents "don't know their rights. They think they have to leave as soon as they get a foreclosure notice." Even when a lender obtains court approval to foreclose, as required in New Jersey, they often do not complete the process by taking the house to sale, he said.
That leaves displaced families on the hook to pay taxes and maintain their former homes, even if a judge has approved the foreclosure, Menendez said. Others may leave homes when they still are able to contest the action, he said.
Municipal officials frequently are left uninformed, unsure where to send tax bills, he said. That has been an ongoing issue in East Orange, which is a national leader in combating foreclosure-related problems, he said.
His bill, the “Preventing Abandoned Foreclosures and Preserving Communities Act of 2016,” would require mortgage servicers to tell borrowers at the beginning of a foreclosure that they are allowed to remain in the home until the process is completed under state law. It would also require mortgage servicers to notify borrowers that they remain responsible for taxes, assessments, or other fees during foreclosure.
The bill also requires the servicer to notify both the borrower and the municipality if it or the mortgage-holder walk away from a foreclosure without completing it. But it would prohibit servicers from walking away from mortgages backed by Fannie Mae (Federal National Mortgage Association) or Freddie Mac (Federal National Home Mortgage Corp.) and insured by the Federal Housing Administration without notifying them and the municipality and releasing the lien.
Another element of the Menendez bill is that it would authorize the General Accountability Office and the Consumer Finance Protection Bureau to study the prevalence and impact of “zombie foreclosures.”
With housing prices low in many communities, "lenders have little incentive to complete foreclosures and begin paying for property upkeep and taxes," said Linda Fisher, a Seton Hall University law professor who has advised Menendez on the issue. "The banks don't want to be stuck with broken-down, decrepit, vacant houses."
Housing advocates joined Menendez, Fisher, and other officials to praise East Orange for leading efforts to minimize the harm that "zombie" homes can do to property values and to public health and safety. With no one living in them or taking responsibility for their upkeep, these properties can become magnets for drug-taking, illegal dumping, or other ills, speakers said.
In East Orange, city officials have stabilized the old house that was the backdrop to the Menendez announcement, as well as a smaller one across the street. They boarded up doors and windows, cut the grass, and even chased out an off-the-books auto shop that operated in the backyard.
But as if to underline the challenges, a raccoon poked its snout through a crack in the house's second-story eaves to follow the senatorial hubbub.
While the event was happening, the New Jersey court system recorded foreclosure case number 17,820 so far this year, in Burlington County. That is down from tallies in recent years, but compares to 18,000-20,000 for entire years before the bursting of the housing bubble in 2007 and the Great Recession.
A real-estate analytics firm, RealtyTrac of Irvine, CA, lists 4,003 "zombie foreclosures" in New Jersey, more than one-fifth its nationwide total. But that methodology understates the problem, because it only counts units already identified as vacant.
The speakers credited East Orange as a leader among municipalities that have effectively used a 2014 state law that allows them to impose daily fines on foreclosing creditors who fail to maintain properties. "Code enforcement is the driver of change in a community," said Dwight Saunders, the city's property maintenance director. But in the fractured world of modern mortgage finance, tracking down those legally responsible "takes all your investigative skills," he said.
After deregulation of the financial markets at the turn of the century, mortgages were transformed from straightforward transactions between a borrower and lender into the building blocks of risky new investment instruments, often sold with little concern for the value of the underlying real-estate deals.
That house of cards collapsed into the Great Recession, but more than ever, American real-estate is owned by myriad investment groups, hedge funds and other entities, often with sketchy paperwork trails.
At the North Grove Street property singled out by Menendez, East Orange officials were aware that the 90-year-old owner, in failing health, had moved out after being hit with a foreclosure notice. When the property became a blight on the neighborhood, the city decided to raid the house and stabilize it, Saunders said.
The city has recouped $1.2 million in fines under the 2014 law, which more than covers the cost of the six employees assigned to the program, he said. Neighbors have bought into it, doing more work to fix up properties adjacent to those targeted by the city, Saunders said.
The property maintenance bill is one of the few anti-foreclosure measures to have gotten past New Jersey Gov. Chris Christie, who has diverted federal aid away from helping affected homeowners.
Similarly, foreclosure prevention has not been a priority in Washington. A projected $26 billion mortgage fraud settlement, brokered by the Obama administration with major banks, led to more participants losing their homes than keeping them. The deal let banks take credit for "saving" homes from foreclosure that they instead obtained through short sales or deed surrenders.
Meanwhile, the U.S. Treasury took financial control of what had been government-sponsored entities, privately run mortgage-lending giants Fannie Mae and Freddie Mac, which were left on the hook after absorbing risky mortgages from the big banks.
East Orange officials have been spearheading a national effort to get the Federal Housing Administration, Fannie, and Freddie to sell more troubled mortgages to nonprofits willing to deal with homeowners and fewer to hedge funds ready to foreclose. But now that Fannie and Freddie are returning major profits to the Treasury, the Obama administration has floated the idea of allowing big banks to take control of them.
Against that background, Menendez's zombie foreclosure legislation is aimed for after the election, when a new Congress and administration may be more inclined to help homeowners and municipalities.