What is a ‘Zombie Mortgage’?

For most buyers, mortgages are the cornerstone of purchasing a home. Sometimes a second mortgage is necessary, too, to cover the down payment, for instance. But what happens if that second mortgage seems to have been forgiven but actually still exists? Introducing: the “zombie mortgage.”

These aren’t creatures from the underworld, but mortgages that homeowners forgot about or lenders said they would write off, but didn’t, only to reappear years later, according to the Consumer Financial Protection Bureau.

As home prices continue to soar, zombie mortgages are seeing a “second wave,” said David Weber, a professor at the Creighton University School of Law. (The first wave, he said, occurred after the recession in the fall of 2008.)

“The zombie nomenclature stuck because it was so catchy,” Mr. Weber said. “With these second mortgage issues that are going on right now, it’s not that they’re coming back to life. It’s just that they were laying dormant.”

A homeowner might have no idea that a secondary lender is on the title to their property, Mr. Weber said, and the lender can choose to exercise their rights to the property when it becomes financially viable for them to do so.

Here’s what to know about zombie mortgages and how to protect yourself.

The term originates from the aftermath of the foreclosure crisis in 2008 amid an increase in residential mortgage loans that defaulted, according to Andrea Boyack, a professor at the University of Missouri School of Law. Lenders would start the foreclosure process or announce a default, but never follow up because they didn’t think they would be able to recoup their investment.

Because of that, homeowners might have thought that their mortgage debt was forgiven or had been satisfied, but the debt actually still existed, said Michael Neal, a senior fellow at the Urban Institute, a policy think tank in Washington. The typical statute of limitations for debts and contracts is six years, Mr. Weber said, and lenders can seek payment within six years from the date they file suit. (Some jurisdictions might have a longer statute of limitations between 10 and 30 years, Mr. Weber said.)

However, a zombie mortgage is not an actual type of mortgage. Rather, “it’s just a mortgage that’s been dormant, that people have forgotten about,” Mr. Weber said.

Zombie mortgages were the focus of a recent investigation on NPR, which analyzed foreclosure data in several states.

In the past two years, according to NPR, there were at least 10,000 second mortgages in New York “that foreclosure activity had been initiated on,” but that had been originated between 2004 to 2008. NPR spoke to homeowners with those second mortgages, including one woman who was subject to a foreclosure auction after initially thinking the debt collection was fraud.

In 2008, these types of mortgages occurred with either the first or second mortgages. Now, Mr. Weber said, they’re mostly only happening with second mortgages. If a homeowner is paying their first mortgage but not their second, Mr. Weber said, the secondary mortgage holder has the right to foreclose on the property.

Both Mr. Neal and Mr. Weber attributed the increased attention to zombie mortgages to the rise in home prices. The median home sale price has hit another record high, increasing 4.4 percent to $394,000 in the last month, according to Redfin, but mortgage rates have declined. Rising property values build equity into a property, enabling a secondary mortgage holder to make money even after the first mortgage holder is paid, Mr. Weber said.

Foreclosure filings have also started to increase as well, Mr. Weber said, which could indicate renewed interest.

“If you’re looking at the number of these foreclosure filings, or at least the attempts to collect on this zombie debt, you’re starting to see the numbers tick up dramatically into the thousands, if not more, in individual jurisdictions,” Mr. Weber said. “That’s a lot of activity.”

Lenders and debt collectors are legally required by the Truth in Lending Act, a federal law, to provide monthly notices to homeowners about how much debt is owed and why, Mr. Weber said. If there’s no communication about the amount of debt owed, then that is illegal.

When a homeowner defaults on a mortgage, a lender can decide if and when to foreclose. “It is not legal to foreclose on a mortgage without following the proper process,” Ms. Boyack said.

A zombie mortgage could also become a consumer protection issue, if it could be shown that the consumers had been misled. For example, Ms. Boyack said, consumers could have been misled into trading “short-term peace of mind for long-term security in the home.”

Lenders have the right to seek repayment on a debt or foreclose because they’re owed that money, Mr. Weber said.

For someone to lose their home, the case would have to go through a heavily regulated foreclosure process, Mr. Weber said, requiring several notices and sometimes a property auction.

If the investor who holds the mortgage forecloses on the property and receives the proper “redemption rights,” then they can evict the homeowner, pay off the first mortgage holder and own the property outright, Mr. Weber said.

It’s unlikely that someone would unknowingly sign onto a zombie second mortgage, Mr. Weber said.

However, if homeowners caught in a zombie mortgage get a phone call from an unfamiliar lending company, not their original one, they might ignore the notice if think they’re getting a “scam attempt,” he said.

A good first step, Mr. Weber said, is to check the property title for what encumbrances or liens are listed on the document, which can be checked by you, a lawyer or a title company. Doing so will let you know if there is still a second mortgage on the title.

If you’re caught in a zombie mortgage, a lawyer could help you challenge it in court. In almost every case, Mr. Weber said, a homeowner can get the fees and interest waived. “But, oftentimes they’re able to get the entire second mortgage just removed from the title,” he said.

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