Zombie foreclosures: borrowers discover debts years later

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Since the housing bubble burst, almost two million properties have started but never completed the foreclosure process. While no one knows the exact number, it's estimated that tens of thousands could be "zombie foreclosures."

In these cases borrowers move out after their bank schedules a foreclosure auction only to find out months or years later that the auction never took place or the bank never transferred the deed. The borrower still technically owns the house and thus owes property taxes, fees and homeowners' association dues, and they can find themselves hit with a surprise bill well after their foreclosures.

In a $25 billion settlement with the state attorneys general last spring, the nation's five largest mortgage lenders agreed to inform borrowers of any decision to forgo or delay a foreclosure. But victim's attorneys said the banks have not been careful about following that policy.

Rose Nathan, a 37-year-old office manager told CNNMoney that she lost her South Bend, Ind., home in January 2009, after working out a deal with CitiMortgage to voluntarily walk away in a "deed in lieu of foreclosure."

"On Christmas Eve, the bank called and told me a sheriff's sale was coming and I had to move out right away," she said. "So that's what I did — seven days after New Year's." Nearly two years later, she received a $5,000 property tax bill from the City of South Bend. The bank had never taken possession of the house. Citi told Nathan's attorney, Judith Fox, that the holdup was due to a lien on the home, but Fox did a title search and found no evidence of a lien until well after the bank agreed to the deed-in-lieu deal.

Many of these homes are in low-income communities where foreclosures are so difficult to sell that lenders delay taking possession to save on taxes that then stay under the borrower's name. Debts on these improperly foreclosed homes can go unpaid for years because borrowers are unaware they owe them. Credit scores drop and interest rates spike, making life after foreclosure even more difficult.