The Zombies are coming for you. Just not in the way you imagined.
“Zombie Mortgages” sounds like the title of a bad spoof on a horror movie. But like they can “rise from the grave” to terrorize your finances and quality of life. Hopefully you never end up in the cast of this movie, but it’s good to know what a Zombie Mortgage is so you can take preventive action, should the need ever arise.
If you’ve ever run into debt issues in the past, and had some of your mortgage debt “forgiven” by a lender, you may have thought your troubles were behind you. Sometimes that’s the case and sometimes, unfortunately, it’s not. Years later, seemingly out of nowhere, you might be contacted by a debt collector about a large lump sum payment you owe in a hurry, likely a sum vastly more than the debt originally “forgiven.” Or worse, you might receive a foreclosure notice.
How can this happen? Your debt may have been written off by the lender, but never really went away. Instead of going away for good, they were sold for pennies on the dollar to debt collectors or investment firms that deal with distressed debt. In the meantime, the mortgage company, having passed on the debt to someone else, would have stopped sending you “past due” notices further reinforcing the belief that the matter was closed. Years later, maybe a decade or more, when the price of your house has grown substantially the debt collector or investment firm will then reach out to collect, knowing that you now have more than enough equity in your home to pay. Because these mortgages reappear after being considered “dead,” they’re sometimes called “zombie second mortgages.”
Before the Great Recession of 2008 lenders sometimes sold borrowers two mortgages for the same property, instead of one. For example, a primary mortgage might cover 80% of the loan, and a second mortgage covered the remaining 20%. [Note – this primary/secondary structured home loan still exists and can be beneficial in certain circumstances if you want 100% financing; just be aware in advance of the pros and cons before you commit to one].
As the Great Recession hit and the economy shrank, people had trouble making mortgage payments. Many borrowers got loan modifications or declared bankruptcy. Some lenders went out of business and loans they had on their books were sold off to other lenders, who continued to work with the home owner to resolve their issues. In other cases, however, the original lender wrote off the second mortgages, not expecting to be paid because of falling home prices, and sold the debt on to investors and speculators at a big discount. The borrower may have been oblivious to this arrangement, or known about it but forgotten, until years later when they received a demand for the capital owed plus years of interest and late fees on top of the principal balance of the second mortgage. This could easily add up to tens of thousands of dollars or more.
Given the prevalence of this issue the Consumer Finance Protection Bureau has been taking action to protect home owners from improper or even illegal activity relating to zombie debt and zombie second mortgages. In particular they are warming debt collectors and advising home owners that it is illegal for debt collectors subject to the Fair Debt Collection Practices Act to use or threaten to use judicial processes, such as foreclosure, to collect a debt after a state’s statute of limitations expires. Read more about their guidance.
If you are contacted by a debt collector about a mortgage you thought was in order or fully written off, here are some immediate steps you can consider.
Step 1: Verify the debt and review these CFPB recommendations for dealing with debt collectors. Don’t take what the servicer or debt collector tells you at face value. You generally have the right to ask a debt collector about the debt, including the legal grounds they have for claiming you owe the debt. You will also generally be provided with information at the outset of collection activity, usually in a written letter, that is called the “validation information.” This information must include:
- The amount of the debt
- The name of the creditor you owe
- A description of certain rights under the federal Fair Debt Collection Practices Act. Learn more about your rights when dealing with debt collectors.
Step 2: Have a lawyer check whether the debt collector’s statutory time to collect the debt has run out. Some state laws set time limits on collecting mortgage debts. In some states, the law allows an old debt to be collected but removes the possibility of foreclosure, and in other states the law may remove an old mortgage from the property altogether. You’ll probably need a lawyer’s help to find out what laws apply in your situation, and whether the debt is considered old enough that a debt collector can no longer collect on it. But the modest expense for this initial consultation will be well worth it.
You can also speak with the Credit Union for free, confidential advice. We own a home loan company and may be able to help you explore your options, including refinancing on more favorable terms. Learn more about our home loan company (Community Mortgage Funding) by contacting your branch, calling 800.877.2345, or visiting figfcu.org/mortgage.