In recent years, zombie mortgages have resurfaced, causing financial nightmares for many homeowners. These old, forgotten debts are rising from the grave, threatening homes across the country. Here’s what you need to know about this alarming trend.
What is a Zombie Mortgage?
Zombie mortgages are typically second mortgages that homeowners thought were resolved or written off. These debts have been dormant for years but are now resurfacing due to various factors, including clerical errors and improper processing of paperwork. In some cases, homeowners included these second mortgages in bankruptcy filings, mistakenly believing they were discharged. However, mortgage debt is typically not dischargeable through bankruptcy, meaning the debt can reemerge later.
This issue is particularly prevalent with loans from the period leading up to the 2008 financial crisis. Back then, piggyback loans, also known as 80/20 loans, were common. These loans allowed buyers to finance 100% of their home purchase by combining two loans: the primary mortgage covering 80% of the purchase price, and the second mortgage covering the remaining 20%.
During the Great Recession, home values fell sharply, leading many homeowners to default on these second mortgages. Some lenders wrote off these debts as bad loans or sold them to debt collectors for a fraction of their value. In some instances, lenders simply stopped contacting borrowers, creating the false impression that the debts were forgiven or resolved.
As home values have rebounded and even surpassed pre-crisis levels, these old debts have become attractive to debt collectors. They are now reviving these zombie mortgages and demanding repayment, often with added interest and fees. This has resulted in an increase in foreclosure actions related to these old debts, putting many homeowners at risk.
Who Is Being Impacted?
Thousands of Americans have received foreclosure notices on these old debts. Many homeowners, who thought their second mortgages were settled, are now facing the threat of losing their homes. The Consumer Financial Protection Bureau (CFPB) has issued warnings about the illegal practices some debt collectors use when pursuing these old debts. The sudden reappearance of these debts can cause immense stress and financial hardship for affected homeowners.
Karen MacDonough, who had been living in her home for 17 years and was current on her primary mortgage, suddenly received a foreclosure notice. This shocking notice claimed she owed money on a second mortgage she thought was resolved years ago. Despite her regular payments on the primary mortgage, this old debt resurfaced, leading to a foreclosure sale on her home. Karen’s story is not unique; thousands of homeowners across the country have faced similar situations, blindsided by foreclosure notices on debts they believed were long settled. – KNPR.org
Protect Yourself
Homeowners can take several steps to protect themselves from zombie mortgages:
- Regularly Check Mortgage Records: Keep an eye on your mortgage statements and records to ensure there are no unexpected claims or notices. Regular monitoring can help you catch issues early. This involves checking public records and ensuring that any liens or claims against your property are legitimate and current.
- Stay Informed About Your Debts: If you had a second mortgage or any old debts, confirm their status. Contact your lender to ensure that these debts have been properly settled and documented. Maintaining accurate records and having copies of all settlement documents can help prove that a debt has been resolved.
- Consult a Real Estate Attorney: If you receive any suspicious notices or if you’re unsure about the status of an old debt, consult with a real estate attorney. They can help you understand your rights and the best course of action. An attorney can also assist in negotiating with debt collectors or disputing invalid claims.
- Create a Special Savings Account: Deposit the amount you would have paid on the mortgage into a separate savings account. This can serve as a financial buffer if a zombie debt resurfaces, giving you negotiating power and protecting your financial stability. This fund can also provide immediate resources to address any unexpected claims.
- Contact Federal Lending Agencies: Agencies like Fannie Mae and Freddie Mac can provide information on lenders and their successors. This can help you track down the current holder of any old debts. These agencies have extensive databases and resources to assist homeowners in locating the rightful debt holders.
- Respond Promptly to Notices: If you receive a notice from a debt collector, do not ignore it. Verify the legitimacy of the claim and seek professional advice immediately. Quick action can prevent the situation from escalating. Ignoring such notices can lead to legal actions and further complications.
- Report Illegal Practices: If you suspect that a debt collector is using illegal tactics, report them to the CFPB. The bureau can investigate and take action against unethical debt collection practices. Protecting yourself from predatory practices is essential, and reporting such actions helps others avoid similar issues.
By staying vigilant and taking proactive steps, homeowners can protect themselves from the unexpected financial burden of zombie mortgages. For more information and advice on handling zombie mortgages, click here to contact us. We’re here to help you navigate through these complex issues and secure your financial future.