A “zombie” mortgage refers to a mortgage debt that was presumed to be settled or forgiven long ago but still lingers.
If you’re afraid of zombies, you should be even more afraid of zombie debts. You thought they were dead, but they come back. These old debts might have been written off by the lender and sold to debt collectors for a fraction of their original value. In some cases, the mortgage company may cease communication and stop sending statements
. Years later, a debt collector might contact you to collect on the debt. These mortgages are called “zombie” second mortgages because they seem to come back to life after being considered dead or gone.
Why did some borrowers have second mortgages on their homes? Before the 2008 Great Recession, it was common for mortgage lenders to provide two mortgages for the same property. For instance, a primary mortgage might cover 80% of the purchase price, while a second mortgage would cover the remaining 20%. Sometimes, the second mortgage was taken out as a home equity loan after the house was bought.
When the Great Recession hit and home values plummeted, many people struggled to make mortgage payments. If a borrower defaulted on a second mortgage, the mortgage holder could initiate foreclosure even if the first mortgage was current. However, for business reasons, some holders of second mortgages wrote off their defaulted loans as uncollectible and stopped contacting borrowers. Some sold these loans to debt buyers without informing the borrower. As a result, many borrowers believed their second mortgages had been resolved through modification, bankruptcy discharge, or forgiveness, especially since they received no notices or statements for years.
Now, as borrowers have paid down their first mortgages and property values have increased, some are being contacted by companies claiming the right to collect on the long-dormant second mortgage. These companies, including debt collectors, may threaten foreclosure and demand payment of the outstanding balance, plus fees and interest.
