Taxing Zombies: Killing Zombie Mortgages with Differential Property Taxes

Abstract

Zombie mortgages and abandoned properties are costly problems for cities and counties across the country. The term “zombie mortgage” is meant to, and hopefully does, evoke images of undead mortgages that are nearly impossible to eliminate. In the legal literature, the term is used to describe the circumstance when a lender or mortgagee has initiated foreclosure proceedings, the homeowner has quit the premises, and the lender later abandons the foreclosure process, often without notifying the owner of record. The mortgages, accompanying fees, and real estate taxes are “zombies” because the affected homeowner cannot escape them by abandoning the property, even after notice of eviction. Generally, the affected homeowner cannot shed these “zombies” through bankruptcy, either.

This Article argues that a tax-based tool known as differential property taxes could alter the status quo in a way that incentivizes owners or lenders to improve or dispose of the vacant property much more quickly than in the past and, thus, combat “zombie mortgages.” This Article analyzes the legality of differential taxation as a tool for combating vacant property and highlights the legal impediments faced in certain jurisdictions. Strategic implementation of differential property taxes could be another effective tool to use in the ongoing battle against vacant and abandoned properties.

Keywords: zombie mortgage, vpro, differential tax, property tax, bankruptcy, foreclosure

JEL Classification: K11