Fighting the Undead: Why States Should Use Forced Vesting to Kill Zombie Mortgages

Abstract

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.