Jun 21, 2024
Imagine the shock: A homeowner’s second mortgage — long believed to be paid off or forgiven years ago — comes back from the dead in the form of a letter from a debt collector. Repay the loan now, the notice says, or face foreclosure.
It’s a horror story that’s becoming increasingly common in some U.S. states. Sophiea Lipford, a homeowner in Alexandria, Virginia, told NPR that she and her husband have owned their home for 18 years. He’s a contractor and she’s a surgical technician and the couple have raised their kids there. “I saw this foreclosure letter and I just panicked and started to cry.”
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Lipford added, “We’re gonna lose our home.”
This situation is one of many connected to so-called “zombie mortgages” — second mortgage debts on properties that homeowners believed were long “dead”, either through settlements, loan modifications, or foreclosures. But these mortgages were often never officially discharged or foreclosed, leaving the door open for lenders — motivated by today’s higher home values — to collect on those debts.
As a result, many homeowners are being blindsided by notices demanding payment years after thinking their mortgage troubles were behind them.
The scope of the problem
New York has seen at least 10,000 foreclosures tied to zombie second mortgages, NPR reported. The problem has spread to Maryland and Massachusetts, among other states.
The problem dates back to before the 2008 Great Recession, when mortgage lenders frequently issued two mortgages for a single property. A primary mortgage covered 80% of the purchase price and a secondary mortgage covered the remaining 20% (called 80/20 loans) — meaning income-strapped buyers didn’t need to come up with a down payment.
As the Great Recession hit, however, homeowners increasingly had trouble making payments. Defaults on second mortgages allowed holders to start the foreclosure process even if the first mortgage was current.
Many second mortgage holders wrote off these loans as uncollectible or sold them to debt buyers without notifying borrowers. Consequently, some borrowers believed their second mortgages were modified, discharged, or forgiven, as they received no further communication for years.
Debt buyers have become aggressive in recent years, purchasing old and delinquent mortgages for cheap (without the consent or knowledge of the borrower) and then pursuing the full amount owed to capitalize on their investments.
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What can homeowners do?
The federal government’s Consumer Financial Protection Bureau (CFPB) said it could be illegal for debt collectors, governed by the Fair Debt Collection Practices Act, to use or threaten legal actions like foreclosure to collect debts after a state’s statute of limitations has expired.
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Unfortunately for homeowners, lenders who work within those time limits appear to have the right to chase down these loans and, in many cases, threaten foreclosure.
While facing a zombie mortgage can be daunting, homeowners have a few options:
Review mortgage documents: Homeowners should thoroughly review their mortgage documents and any settlement agreements from past modifications or foreclosures. Understanding the terms and conditions of these agreements can help determine if the second mortgage was indeed resolved.
Seek legal advice: Consulting with a real estate attorney or a housing counselor can provide valuable guidance. Legal professionals can help homeowners understand their rights and explore possible defenses against foreclosure actions.
Negotiate with lenders: In some cases, negotiating directly with the lender or the debt collector can lead to a resolution. Homeowners may be able to settle the debt for a reduced amount or establish a payment plan that fits their financial situation.
Refinance or consolidate debt: If feasible, homeowners might consider refinancing their primary mortgage to pay off the zombie mortgage. Consolidating debt can simplify payments and lower overall interest rates.
File for bankruptcy: As a last resort, filing for bankruptcy can provide temporary relief from foreclosure proceedings and offer an opportunity to restructure or discharge debts, including zombie mortgages. However, this decision should never be taken lightly.
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Chris Clark is a Kansas City–based freelance contributor for Moneywise, where he writes about the real financial choices facing everyday Americans—from saving for retirement to navigating housing and debt.
