The Rise of Zombie Mortgages

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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