The Scary Truth About Zombie Mortgages (and How to Fight Back)

Just when you thought it was laid to rest, it haunts you. No, we’re not talking about a horror movie villain—we’re talking about zombie mortgages. These “undead” debts are being resurrected and catching many homeowners off guard. Some found their long-time homes sold out from under them.

Why call them “zombie” mortgages? Much like their fictional namesakes, these long-forgotten second or unresolved mortgages seem dead but have a nasty way of returning to life. They’re especially relevant in the aftermath of the 2008 housing crisis and more recent economic shifts. 

If you’re a homeowner with a second mortgage, someone buying an older home, or a legal professional, being aware of zombie mortgages could help you avoid an unexpected financial nightmare.

What Is a Zombie Mortgage?

A zombie mortgage is a mortgage that was believed to be settled, discharged, or satisfied long ago but remains legally active. In the vast majority of more current cases, they are typical second mortgages.

Common Scenarios

Zombie mortgages typically arise in situations like:

• Incomplete Foreclosures: A homeowner loses their home in foreclosure but later discovers the foreclosure process wasn’t finalized. The mortgage and any accumulating fees or penalties remain on the books.
• 80/20 Mortgages: Before the housing market crash in 2008, some borrowers used these loans to buy a home. The 80% first mortgage covered the home, while the 20% covered the down payment. Then the housing bubble burst and home values tanked. Many borrowers kept up with their first mortgage but fell behind on the second. Sometimes, during a loan modification or refinancing process, the borrower was verbally told the bank has forgiven or won’t pursue the debt. However, no official paperwork says the mortgage company cleared the loan. Sometimes, homeowners modified their first mortgage and mistakenly believed the modification applied to both loans. In reality, the second mortgage stayed in default, unresolved and forgotten.
• Home Equity Loans: A similar scenario happened with a secondary or home equity loan. The second mortgage holders couldn’t keep up with the loan, and was written off but not necessarily forgiven.

How Homeowners Find Out

Most property owners only discover these “undead” mortgage debts when:

• They receive an unexpected debt collection notice or phone calls.
• They’re hit with a lawsuit demanding that the mortgage debt be paid in full with retroactive interest.
• They face foreclosure threats years after resolving their primary mortgage.
• They receive unexpected foreclosure notices on the house.

Talk about a rude awakening, right?

Risks to Homeowners

• Sudden Payment Demands: Years after you’ve paid off your primary mortgage, that long-buried second loan might resurface with interest and late fees. It may not come from the original mortgage company, but from a debt buyer.
• Legal Action or Foreclosure Threats: Lenders or debt buyers can initiate foreclosure proceedings based on the outstanding second mortgage. As home values have increased, they threaten foreclosure on these non-forgiven mortgages, catching many homeowners off guard.

It’s a devastating surprise for homeowners who thought their mortgage was satisfied long ago.

Understanding Zombie Second Mortgages

Second mortgages can become the ultimate terror for homeowners who thought the debt was resolved. How does a home loan become a zombie? It’s in the details.

What Is a Second Mortgage?

A second mortgage is a loan taken against the same property, typically after the first mortgage is already in place. But secondary debt rears its head when a first mortgage is paid off, refinanced, or foreclosed on without addressing the second mortgage.

How the Scenario Works

There’s no single way a second mortgage becomes a zombie mortgage, but there has been a trending scenario in recent years. Before the 2007-2008 housing crisis and the legislation that arose after it, some homeowners carried two mortgages. These could have been for any reason: home equity loans for renovations or another expense, a special 80/20 loan that made a down payment achievable. In the run-up to the 2008 financial crisis and Great Recession, risky mortgage practices like these contributed to the emergence of zombie mortgages.

For a while, the homeowner made mortgage payments on their primary and second mortgages, but then something happened. Maybe they refinanced to make the payments more affordable, or in the aftermath of the housing crisis, they sought a loan modification to avoid bankruptcy. 

The second mortgage wasn’t officially dealt with during the process. In some cases, someone at the mortgage company may have insinuated that the debt was forgiven, taken care of, or that the bank wouldn’t pursue it. The homeowner stopped receiving statements or saw their payments decrease, suggesting the debt was lifted.

At the time, many loans were underwater because housing values tanked. It wouldn’t have made financial sense for the bank to pursue the loan. But until the debt is forgiven in writing, it still exists. Financial institutions held the lien but didn’t collect payment. They sold the debt to other companies, some in the business of collecting on debts.

After the significant rise in property values starting in 2020-2021, cashing in on these old debts became financially profitable. That’s where the idea of a “zombie” debt rises from: a loan the homeowner thought was dead and buried now has returned to life with a debt collector demanding payment or starting foreclosure.

The Process of Zombie Foreclosure

How, you ask, can a lender still come after property years later? Here’s a quick look at the process.

Old debts, including zombie second mortgages, are often bought and sold for pennies on the dollar. Debt collectors purchase these debts for very little and then attempt to recover the full amount, adding exorbitant fees along the way. 

Given the pervasive nature of financial fraud nowadays, some homeowners think calls from debt collectors or notices are scams and ignore them. These old debts, including zombie second mortgages, can come back to haunt borrowers unexpectedly. Some lack enough money to pay off the retroactive fees and tax obligations.

Statutes of Limitations

The ability to collect a debt or foreclose varies by state. While every state has statutes of limitations, some lenders attempt to sidestep these laws, hoping homeowners don’t challenge them. Protections against zombie mortgages vary across different states. In some, lenders may be able to collect on the debt without the option to foreclose, whereas in other states, the amount may be completely wiped away by law and statues of limitations.

The Emotional and Financial Impact

Receiving a foreclosure notice out of the blue? It’s emotionally draining and financially destabilizing. Families suddenly face mounting payments they weren’t prepared for or even risk losing their homes, all while dealing with legal headaches. During the foreclosure process, the first mortgage absorbs all the money needed to cover its debt, leaving any remaining funds to address the second mortgage, which can emerge later as a financial burden for homeowners who thought their debts were resolved.

Expert Insight: Real Estate Lawyers Weigh in

Want to know more? You don’t have to take our word for it. Real estate attorney Steve Lehto breaks it all down in the video, Zombie Mortgages Returning to Haunt Homeowners, exploring exactly how zombie second mortgages work and what homeowners can do to protect themselves.

Takeaways from the Experts

• Homeowners Have Rights: Just because you’re contacted doesn’t mean the debt is enforceable. If it is, that doesn’t mean the additional interest and late fees are valid without proof that they sent regular statements.
• Debt Collectors Must Prove Ownership: Collectors must validate the debt and prove they own it.
• Challenge the Debt Legally: If you receive a notice, don’t panic. Seek legal advice to determine your best course of action. The National Consumer Law Center has been instrumental in highlighting the issues surrounding zombie mortgages.

How to Handle a Zombie Mortgage

Even after years of inactivity or communication breakdowns, borrowers can still owe the money on a second loan. If you’ve had a dead mortgage resurface unexpectedly with increased amounts due to interest and fees, here’s how to handle it. 

Steps to Take

• Verify the Debt: Just because you’re contacted doesn’t mean the debt is enforceable. Is it legitimate? Request a debt validation notice in writing from the lender or collector. Retroactive interest and accumulated fees pose significant financial burdens on homeowners, making it crucial to verify all details.
• Seek Legal Help: If you receive a notice for debt payment or someone is about to foreclose, don’t panic. Contact an experienced foreclosure defense attorney. Let their legal expertise review your rights and available defenses in your state.
• Explore Resolutions
  • Negotiate a Settlement: Many lenders or debt collectors are open to settling for less than the full amount owed.
  • Loan Modification: Adjust terms for manageable payments.
  • Short Sale: If foreclosure seems inevitable, a short sale could reduce your financial burden.
  • Legal Defenses: Assert protections under the statute of limitations or even file for bankruptcy if needed.

Know What You’re Up Against

Lenders or debt collectors sometimes test the waters to see if you’ll pay up. Standing firm and legally challenging their claim can be enough to shut down illegitimate demands.

Preventing Zombie Mortgage Issues

Proactive steps are key to avoiding getting caught off guard. As home prices rise, lenders and debt collectors are increasingly incentivized to pursue old debts previously thought to be settled or forgiven.

Tips for Homeowners

• Monitor Your Credit Reports Regularly: Look for any unexpected changes, like new or reopened accounts. The credit report should show if you have any unresolved loans or liens.
• Hold Onto Crucial Documents: Store foreclosure paperwork, mortgage payoff statements, or discharge documents in case a zombie mortgage creeps up.
• Stay Cautious with Old Debts: Don’t assume a second mortgage is gone for good, even if you haven’t heard about owing a payment in years. Rising home prices have incentivized mortgage companies and lenders to recoup their money. 

Tips for Homebuyers

• Buyers must conduct a title search to avoid unexpected financial liabilities. It helps uncover unpaid debts tied to the property, such as a second mortgage that may not have been disclosed.
• Identifying and addressing unpaid second mortgages before closing the purchase ensures a clear and stable transfer of ownership.

Don’t Let a Zombie Mortgage Scare You

Zombie mortgages might sound like a financial horror story, but with the right approach, they can be overcome.

To recap:

• Learn the conditions that create a zombie mortgage, including second mortgages and foreclosures.
• Verify the debt’s legitimacy and consult a legal expert immediately if contacted. Don’t pay anything until you get a legal review. No one should face the unexpected stress of a zombie mortgage alone. 
• Be proactive in monitoring your financial history to prevent surprises down the line.

Much of today’s zombie mortgage problem lies rooted in the 2008 financial crisis when home prices collapsed. Now, with the reverse scenario at play, debtors are cashing in. It’s creating an unexpected financial burden for former borrowers who believed their mortgages were resolved.