Don’t Let a Zombie Mortgage Stalk You

Long-forgotten second mortgages are resurfacing, leaving some homeowners facing surprise debt.

Old mortgage debts once written off are returning to haunt homeowners. Monthira/Shutterstock

Zombie mortgages seemingly come back from the dead. You might have thought you’re up to date on any loans; however, a collector claims you owe on one and threatens you with collection or foreclosure on your home.

But what are zombie mortgages, and where do they come from? There are some actions you can take to protect yourself if you have one.

Zombie Mortgages Come Back to Haunt You

A zombie mortgage is a debt or mortgage that an individual thought was forgiven, but comes back to life years later.

You might have thought it was taken care of through a loan modification or bankruptcy. Or you could have thought it had been rolled over into your current mortgage. But then a debt collector contacts you and claims you owe the balance plus interest and penalties.

How Did Zombie Mortgages Start?

Before the Great Recession in 2008, mortgage lenders sometimes gave borrowers two mortgages for the same property.

For example, a primary mortgage, recorded in the courthouse first, might cover 80 percent of the purchase price. A second mortgage, recorded in the courthouse after the first mortgage, covered the remaining 20 percent.

According to the Connecticut Fair Housing Center, these were called “piggyback mortgages” and, in some cases, were part of predatory mortgage practices. Borrowers were using these second mortgages in lieu of a down payment.

‘Great Recession’ Causes Repayment Problems

But when the Great Recession hit, and the housing bubble burst, homeowners struggled to keep up with mortgages. Some borrowers were offered loan modifications to change their loan rate, terms, or both to make monthly payments more affordable.

According to Victor Insurance, as part of the modification, many believed or were told by their lending institutions that their second mortgage was being discharged. And when these homeowners stopped receiving statements regarding their second mortgage, they had no reason to question this belief.

Because home values plummeted during this period, many properties were deep underwater. In other words, the mortgage was larger than the home’s value.

According to the National Consumer Law Center, lenders who held first mortgages recovered less when they foreclosed. Second mortgages were almost certain to obtain nothing if the lender decided to foreclose. The owners of these second mortgages wrote them off.

Write-offs were accounting devices used to reflect that the loans had ceased to be income-producing assets. In some cases, the loan’s owner issued an IRS Form 1099-C to indicate that it was seeking favorable tax treatment for a written-off loan.

However, these accounting adjustments didn’t necessarily mean that the borrower was no longer legally obligated to repay the debt. Loan owners retained the option to change their minds and demand payment again.

Why Are Zombie Mortgages Returning?

Zombie mortgages are returning because there is now home equity to devour. Over the past few years, home values have risen in many parts of the country. Homes that were underwater in 2010 are now worth much more. Homeowners’ equity has now become an enticing target.

Who Is Foreclosing on Zombie Mortgages?

It’s a mix of players foreclosing on zombie mortgages. Typically, the original lender isn’t in the picture. The parties threatening are usually debt buyers or their collection agencies.

These debt buyers purchase groups of defaulted loan accounts, then opportunistically select who to foreclose on. The focus is on equity-rich properties.

How to Fight Zombie Mortgage Foreclosures

Statutes of limitation provide a powerful defense against zombie mortgage foreclosures. Under some state laws, the expiration of the statute of limitations for foreclosure not only bars it but can also be a basis for extinguishing the mortgage as an encumbrance on property. Check with your state laws.

It’s also advisable to contact an attorney.

Challenge Authority

The party foreclosing on a second mortgage must have the authority to enforce the underlying contractual documents, the note and the mortgage.

You can request information regarding loan ownership and possession of the relevant contract documents to build a successful challenge to the party’s authority to foreclose.

But debt buyers who acquire groups of defaulted mortgages typically don’t have systems in place to document the transfer of negotiable notes and account histories.

The Fair Debt Collection Practices Act May Help You

The Fair Debt Collection Practices Act (FDCPA) prohibits deceptive or unfair collection activities. Seeking to collect money that is not lawfully owed or enforcing a security interest when there is no present right to do so violates these FDCPA prohibitions.

Contact an attorney to see if you think you’ve been the victim of unfair collection activities.

Latches and Equitable Defenses

An equitable defense may be available to you when the owner of the zombie mortgage seeks to foreclose on an account that has been inactive for years.

According to the National Consumer Law Center, the foreclosure can be barred under the doctrines of unclean hands or laches. There are several elements of laches, one of which is an unreasonable delay in commencing the action. Harm resulting from the unreasonable delay is another element.

Avoid Falling Victim to a Zombie Mortgage

If you are contacted by a collector for a zombie mortgage, the best course of action is to say nothing. Instead, contact the original lender or loan servicer to discover if the debt is still active.

Don’t go it alone; it’s wise to contact an attorney for help.

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