Lawmakers in the U.S. recognized from the beginning of the COVID-19 crisis that homeowners would need help with mortgage payments in order to avoid a surge in mortgage foreclosures. The Coronavirus Aid, Relief, and Economic Security Act had several provisions for homeowners, including:

• A moratorium on foreclosure of single-family homes with federally backed mortgages, which the Federal Housing Finance Agency recently extended until at least Aug. 31
• A mandate that forbearance be provided to homeowners, regardless of their delinquency status
• The loosening of restrictions on modifying loans

Illinois has issued executive orders that put a moratorium on evictions, though it also said that homeowners are still responsible for making mortgage payments. Housing market analysts are concerned that the downturn in the economy could lead to the state’s worst mortgage delinquency rate since the Great Recession of a decade ago.

Obstacles Facing Mortgage Payments

More than one million Illinois residents lost their jobs due to businesses being forced to close or reduce staff in response to the coronavirus outbreak. Even with unemployment benefits and stimulus payments from the federal government, many homeowners have tighter budgets with which to make mortgage payments. In some cases, homeowners may be forced to choose between staying current on their mortgage payments and paying for other necessary expenses.

During the Great Recession, so-called “zombie homes” were a common problem for mortgage lenders. Zombie foreclosure is a way of describing a situation where a home is abandoned after the occupants received a foreclosure notice. The number of zombie foreclosures has decreased since the height of the housing market crash. A recent report on foreclosures during the fourth quarter of 2019 found that 3.1 percent were zombie foreclosures, which is down 5.8 percent from the first quarter of 2014. Illinois had the fourth-most zombie foreclosures in the U.S. with 943, which is 4.7 percent of its foreclosures. Abandoned homes are still a problem that can decrease the resale value of the property.

How Zombie Foreclosure Occurs and Why It Is a Problem

When a homeowner receives their initial foreclosure notice, they may decide to abandon the property instead of contesting the foreclosure process. They may believe that they have no hope of paying back the mortgage and that they are better off leaving before the foreclosure is completed. This causes a major problem for mortgage lenders because an unoccupied property will fall into disrepair. In some cases, the previous occupants may have left the home in bad shape.

A zombie home will decrease in value, even if the lender works to maintain its appearance. The lender cannot sell the home until the foreclosure is finished because it is still in the previous occupant’s name. A zombie home will also decrease the property values of other homes in the neighborhood, some of which the lender may be trying to sell.

Older homeowners can use a reverse mortgage as a source of income or credit. While borrowers qualify for regular mortgages based on their income, a reverse mortgage is based on the borrower’s equity in their home. People age 62 and older are eligible to take out a reverse mortgage on their principal residence as long as they own it outright or have enough equity in it. The mortgage balance is not due until a qualifying event occurs. If the borrower or their heirs do not repay the mortgage, the lender may foreclose on the property.

When Can a Reverse Mortgage Become Due?

According to Illinois’ Reverse Mortgage Act, there are five ways that the balance on a reverse mortgage can become due:

• The borrower or last remaining tenant dies;
• The property is sold;
• The borrowers no longer use the property as their principal residence;
• The reverse mortgage contract included a maturity date; or
• The borrowers failed to meet their contractual obligation to maintain the home.

When the borrowers die, their heirs will determine whether to repay the reverse mortgage, sell the home or allow a foreclosure. The borrowers may leave or sell the home if it does not meet their needs in old age. However, a lender may foreclose on a borrower’s home while the borrower still lives there if the borrower cannot pay property taxes and home insurance or maintain the value of the property. Unlike with other foreclosures, lenders often cannot seek deficiency judgments against borrowers of reverse mortgages if the property sells for less than the balance of the mortgage.

Junior creditors are at a disadvantage when senior creditors decide to foreclose on a debtor’s mortgage. The senior creditor has priority in the foreclosure sale, and the junior creditor may receive little or no compensation for what the debtor owes it because its debt is often unsecured. A junior creditor can be:

• A lender that gave a second mortgage to the debtor with the property as collateral; or
• A party that received a judgment lien against the debtor’s property as the result of winning a lawsuit against the debtor.

A junior creditor can put itself in a position to receive some compensation from a foreclosure by participating in the foreclosure process. It may also file a lawsuit against the debtor to collect money still owed from its lien.

Sale Surplus

A junior creditor may claim the surplus from a foreclosure sale as long as it establishes its lien on the foreclosed property during the process. This requires the junior creditor to:

A mortgagor can complete a foreclosure and sale of a property, all without hearing a word from the mortgagee who is living at the property. However, the mortgagee may object to the foreclosure sale at the last minute, claiming that he or she never received notice of the foreclosure. This may be a delaying tactic or a desperate attempt to hold onto a property. The mortgagee has the burden of proving that the mortgagor failed to properly serve notice of the foreclosure.

Service Methods

A mortgagor tries to directly serve the foreclosure notice to the mortgagee, who confirms receipt with his or her signature. The mortgagor has alternative methods of service when the mortgagee cannot be found, including:

• Leaving it with someone who lives with the mortgagee at the property;
• Mailing it to the last-known address of the mortgagee; or
• Publishing it in a newspaper that the mortgagee is likely to read.

Leaving a foreclosure notice with another party is called substitute service. The server must record the name of the person being served, a physical description, and his or her relationship to the mortgagee. The mortgagor usually follows up a substitute service by mailing the notice to the mortgagee.