Written by Emily Koelsch
If you’re like us, zombie mortgage is a new term to you or one that you hadn’t heard before this spring. NPR did an in-depth report on zombie mortgages in May, and The New York Times followed with an article in late June. At the same time, the term is showing up in headlines and real estate news across the country.
That said, most of us still don’t know exactly what zombie mortgages are or how they impact the real estate industry. To help answer those questions, here’s an introduction to zombie mortgages and some tips for how property owners and investors should deal with zombie mortgages.
What Is a Zombie Mortgage?
A zombie mortgage is a mortgage that a lender or debt collector begins to collect after the loan has been dormant for years. To understand why this is such a prevalent issue right now, it’s important to have some historical context.
How Zombie Mortgages Were Created
In the years leading up to the housing crash of 2008, it was a somewhat common practice for property owners to have two mortgages. A primary mortgage covered 80% of the purchase price. Homeowners unable to cover the downpayment took out a second mortgage. The second mortgage covered the remaining 20% of the purchase price.
After the subprime mortgage crisis, many homeowners fell behind on their second mortgages. At that point, housing prices had dropped significantly so there was little value in the second mortgage. While many lenders had a right to foreclose on properties, there was no benefit to doing so. The value of the home only covered the primary mortgage, so there would be nothing to recover for the second mortgage.
As a result, when borrowers fell behind on second mortgages, most lenders did not take any action. Some lenders just stopped sending notices. Other lenders said the loan had been forgiven or told homeowners not to worry about the second loan.
At the same time, these secondary mortgages were written off as uncollectible. Mortgage companies sold them to collection companies for a fraction of the value of the loan. For example, there’s documentation of a collection company buying 9,000 secondary mortgages for $6,000.
Why Zombie Mortgages Are Coming to Life Now
Companies that bought these mortgages held on to them and waited. Now that housing prices have surged, the secondary mortgages have value. As a result, the companies holding them have started trying to collect them.
After years of thinking the loan was inactive, homeowners are now getting notices saying the loan is in default, payment is due, and significant interest and fees have accrued.
For homeowners, this is shocking and distressing. Most homeowners thought these loans had been forgiven or reworked with their primary loan. They are caught off guard when they get notices that they are in default.
To further add to the confusion, most property owners get calls and notices from companies they’ve never heard of – the companies who, unbeknownst to the homeowner, purchased the loan years ago.
Some homeowners think it’s a scam and ignore the communication. There are even extreme examples of homeowners not realizing the loan was active until people showed up at their homes for a foreclosure auction.
What to Do If You Have a Zombie Mortgage
Zombie mortgages are an increasingly prevalent issue affecting thousands of homeowners. If you have a zombie mortgage or are concerned that you could have an outstanding loan, it’s best to be proactive.
First, check to see if there’s a lien on the title. If you still have an active mortgage, the secondary lender will have a lien on the title. You can check the title yourself or have a title company or lawyer check it.
Next, seek legal help. While the owner of a loan has a right to collect the loan value, certain procedures and requirements have to be followed. There are specific foreclosure processes that have to be followed in all circumstances. In addition, lenders cannot collect interest and fees without giving the borrower monthly statements. An attorney can help property owners navigate this process and ensure their rights are protected.
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What Zombie Mortgages Mean for Real Estate Markets
NPR’s research shows there are currently 10,000 old, secondary mortgages with current foreclosure activity. In Maryland alone, there are over 500 second mortgages in default.
This is a relatively new issue that’s creating uncertainty in real estate markets. Many homeowners, who are current on their primary mortgage and surprised to find that they’re in default, are taking legal action. There are even cases where properties are sold at auctions but the homeowner remains in the property while the sale is challenged in court.
Investors purchasing properties at auctions should be leery of homes being foreclosed on because of zombie mortgages. Given the legal battles surrounding these transactions, new owners could be subject to years of legal challenges.
Right now, debt collectors, homeowners, and attorneys are navigating this new issue. Our advice to investors is to avoid being part of these transactions until there’s more clarity about how they’ll be resolved.
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By John Triplett
Freddie Mac and Fannie Mae have announced new tenant protections for residents in multifamily properties with mortgages backed by the two Government-Sponsored Enterprises (GSEs), according to a release from the Federal Housing Finance Agency (FHFA).
The new multifamily lease standards policy requirement starting February 28, 2028 will require borrowers with new Enterprise-backed financing to provide residential tenants the following three minimum standards which will be included in all residential leases at properties for which applications for new loans are signed on or after the effective date.
The new multifamily least standards are:
- 30-Day Notice of Rent Increases: Written notice of a rent increase at least 30 calendar days prior to said increase;
- 30-Day Notice of Lease Expiration: Written notice of the scheduled expiration of the residential lease at least 30 calendar days prior to said expiration;
- 5-Day Grace Period for Late Rent Payments: A minimum five calendar day period from the rent due date before late fees or other penalties can be charged, e.g., if rent is due on the 1st day of the month, a late fee cannot be charged until the 6th day of the month if rent is still unpaid.
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“Fannie Mae and Freddie Mac’s (GSEs) announcements today of new multifamily tenant protections mark an important milestone by increasing transparency and improving communication between housing providers and tenants,” said FHFA Director Sandra L. Thompson.
In 2023, Fannie Mae financed approximately 482,000 units of multifamily rental housing, a significant majority of which were affordable to households earning at or below 120% of area median income, according to Mortgage Point.
“These lease standards seek to extend the reach of common baseline tenant protections,” said Kevin Palmer, Head of Multifamily for Freddie Mac. “Although many borrowers already exceed these minimum standards, all will be required to meet the standards to obtain GSE financing in the future. The details we released are intended to give lenders, borrowers, and other market participants clearer expectations with regard to how we will implement, monitor, and enforce the new requirement.”
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Source: Entrepreneur
Investing in real estate can be a smart move — but like any investment, making the most of your money and time is key.
It might not seem like the perfect time to invest in rental property considering current real estate trends indicate we’re in a seller’s market but now might very well be.
According to HousingWire, property appreciation was double its already healthy rate in 2020, and there are plenty of indications that home values will continue to rise steadily in 2021 and beyond. Even large institutional investors continue to bet more on the single-family rental space.
Rental properties, then, have the potential to deliver a steady stream of income for investors both now and into the foreseeable future. If you’re an entrepreneur looking to diversify your portfolio — or are just looking for a vacation home that can double as a sound investment — you would do well to consider adding real estate to your list of assets.
Once you do make that decision to invest, however, another question quickly arises: How do you manage that investment? Owning a rental property comes with plenty of rewards, but there’s no denying there’s also hard work involved. The day-to-day management of a rental property can take up days or even weeks of time every year, and not everyone is able to take on that responsibility.
Working with a variety of owners and property managers over the years, I’ve seen how running a property can be either successful or unsuccessful. During this time, I’ve learned a few ways to make property management easier on you, the owner — and better for renters. That journey begins with the decision of who will actually manage the property.
Should you self-manage or hire out?
Many rental owners choose to self-manage their rental properties in order to save money and be more directly involved in tenant screening, property maintenance and pricing decisions. If you have the time, it might make sense to take this route.
According to data from Millionacres, professional property managers tend to take between 8 percent to 12 percent of a unit’s rent on top of other potential premiums, so cutting that cost can feel like a good start for an investment property.
Before you jump solely into the self-managed world, though, there’s a reason property managers are able to charge that amount; they tend to make your life a lot easier and can also protect you from certain legal situations that you might not know how to handle.
Property managers already have best practices in place for dealing with residents — from resident communication, to expectation-setting, to maintenance needs — which means you can avoid the hiccups and risks that can arise with self-management.
Managing a property comes with many variables and considerations that can affect whether your property is a moneymaker or a money pit. This is true if you choose to self-manage or leave the day-to-day operations to a property manager. In both cases, the key is to strike a balance between cutting costs and satisfying everyone’s needs, keeping your time and mental wellbeing as the owner in mind.
Luckily, there are a few things you can do to make property management easier regardless of which path you choose:
1. Do your homework on the market upfront
As with any investment, it’s important you know what you’re getting into before financially committing. That means visiting the neighborhood yourself and reading various real estate reports and government surveys on topics such as census data and home price appreciation.
Ask yourself a few questions: What’s the population growth trend like in the area where you are planning to buy rental property? What about local unemployment and job trends? How is the growth of remote work affecting rental prices in the area? Knowing the answers to these questions can make a huge difference in how a property is managed.
Industry magazines such as Realtor and Multifamily Executive are useful tools to stay up to date on general real estate and long-term rental management trends. Meanwhile, tools such as Transparent and Key Data can help you find information relevant to short-term rental management, such as seasonal demand.
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2. Take a proactive approach
The more proactive you are when managing a property, the easier that task is. For one, residents will be significantly happier, which can lead to positive reviews and more units being filled due to retention and positive word-of-mouth. For another, a proactive approach to things such as maintenance and repairs can save you money during the life of your investment.
One of the best ways to stay on top of things is to spend more at the beginning. High-traffic flooring materials and paints might cost more upfront, but you’ll get your money back (and then some) when it comes to the maintenance costs.
For instance, you also should consider investing in smart technology for your units. Tools such as smart thermostats help keep energy costs down for owners during vacancy and for residents during occupancy.
Similarly, new HVAC system monitoring services can alert landlords of maintenance needs before residents have to pick up their phones, and keyless locks curb re-key costs and improve safety and transparency for residents, because floating keys are eliminated and residents can see who entered their property.
I would also highly recommend installing smart sensors for moisture and leak detection. I’ve seen firsthand how these devices can save owners a significant amount of money and time on repairs.
Water leak damage is the second-most-filed insurance claim, and it costs around $7,000 to repair. Even a small crack in a pipe can leak up to 250 gallons of water in 24 hours. Smart sensors can catch leaks before they become costly floods, and this means less water damage and no mold growth — huge wins for both you and your renters.
3. Figure out how much you want to take on
Even if you’re not concerned about the time commitment involved with managing your property, there are other aspects of management to think about when deciding how much you want to take on yourself. I’ve seen plenty of investors-turned-landlords realize after the fact that they bit off more than they could chew — especially when it comes to dealing with regulatory and compliance issues.
As with any property, there are short-term liabilities to deal with (such as noise regulations and zoning laws) alongside more long-term issues (such as fair housing laws). All of these are often more complicated than they might seem at first.
The recent trend of upzoning in cities such as New York and San Francisco is a good example of the kind of complex web you could be dealing with. In fact, more and more cities are removing old zoning laws that prevented the development of mixed-use and multifamily housing units in order to deal with housing shortages. Although this opens up new opportunities for developers and investors, it also shows how quickly regulations can change.
If it turns out you don’t want to take all of this on but you’re uncertain about hiring a property manager, consider looking at industry associations (such as the Vacation Rental Management Association and the National Association of Residential Property Managers) to find real estate agents in your area who also operate as property managers.
An agent-manager will likely know more about local trends and have a vested interest in managing the property, which means their services will be more competitive. They might even be willing to give you a discount or make their commission part of their property management fees, meaning they’ll save you money.
Real estate is not a short-term market, even with short-term fluctuations. Buying a rental property is a long-term commitment that requires real work to pay off. As long as you get into it for the right reasons and are willing to do your homework -— or hire a property manager to do it for you — you can expect a solid return on your investment.
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