Zombie Mortgages & Potential Foreclosures   

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Many homeowners may have taken second mortgages, including home equity lines of credit, on their homes years ago, and thought that the underlying mortgage debt for such loans was forgiven. Other homeowners may have inherited a home without knowing that there was a second mortgage in place or bought such a home at a foreclosure auction. There are also situations where homeowners obtained a mortgage modification in which both their first and second mortgage were with the same lender; however, the second mortgage was not included in the modification. These scenarios  result in “zombie” mortgages, or mortgages that consumers would assume were satisfied or forgiven but actually still exist. Simply put, these second mortgages may have been written off but were not satisfied. They were forgotten but not forgiven.

How do Zombie mortgages exist?

The lender may have written off the actual debt and sold the debt-to-debt collectors for pennies on the dollar or to other investors. There are investors who buy defaulted mortgage loans at a discount from lenders and then use the discount to offer deals to borrowers whereby the borrowers start repaying their second mortgage to avoid a default and potential foreclosure.

Is writing off a loan the same as satisfying the loan?

According to the Wall Street Journal, these Zombie mortgages are resurfacing as homeowners nationwide are beginning to face foreclosure threats due to the debt remaining, even if the homeowners believed that the debt was being charged off by the lender because they did not receive any monthly statements. While some lenders did charge off such loans after concluding that  they did not consider the likelihood of being repaid substantial, most lenders sold second mortgages which is now causing some borrowers to lose their homes. In fact, nonperforming second mortgages sold for 59% of the unpaid principal balance in 2022, up from 40% in 2021, indicating a higher likelihood of the lender/investor getting repaid.

Taking a second mortgage on a home, such as a home equity line, is not unusual. The issue, however, is that the investment has increased dramatically for those  investors who still hold the second mortgages. Why? In a foreclosure, the second mortgage holder is paid only if there is equity after the first mortgage is paid off. Higher home prices will be able to satisfy the second mortgage holder in full. As a result, there is an emergence of second mortgage investors seeking to potentially foreclose.

Bottom line is this: while you may have taken a second mortgage years ago, and have not received a recent statement, unless that loan was satisfied, the lender may have sold the loan to an investor who may seek repayment.

What does this all mean?

Since housing prices are high, investors are placing more pressure on the housing market by seeking to foreclose on secondary loans. The Consumer Financial Protection Bureau in April held a hearing regarding this issue, and released guidelines indicating that debt collectors cannot threaten foreclosures if the debt at issue is past a state’s statute of limitations. Nevertheless, homeowners must make sure that their second mortgages have been satisfied in order to ensure that they do not have a Zombie mortgage that can be enforced. Unless you have received an IRS Form 1099 indicating the amount of principal and interest that the lender/investor is actually forgiving, you should be weary of that Zombie mortgage lurking in the shadows.

Roy Oppenheim

From The Trenches