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What is a zombie second mortgage?

“Zombie” mortgages are mortgage debts that consumers thought were forgiven or satisfied long ago but that still exist.

The debts may have been written off by the lender and sold for pennies on the dollar to debt collectors. Alternatively, the mortgage company may have simply gone silent and stopped sending statements or communicating with the borrower altogether. Years later, a debt collector reaches out to collect on the debt. Because these mortgages are reappearing after being considered “dead” or gone for so long, they’re sometimes called “zombie second mortgages.”

Before the Great Recession in 2008, mortgage lenders sometimes sold borrowers two mortgages for the same property, instead of one. For example, a primary mortgage might cover 80% of the loan, and a second mortgage covered the remaining 20%.

As the Great Recession hit and the economy shrank, people had trouble making mortgage payments. Many borrowers got loan modifications or declared bankruptcy. Some lenders ceased to exist and sold off their loans while others wrote off the second mortgages, not expecting to be paid because of falling home prices. Some borrowers no longer received mortgage statements on their second mortgages. In fact, many heard nothing about their second mortgage for more than 10 years.

Now, years later, debt collectors are pursuing borrowers on these smaller second mortgages. As property values rise, debt collectors who bought these second mortgages are threatening foreclosure and other collection actions. Debt collectors are now trying to collect years’ worth of late fees and interest, on top of the comparatively low principal balance of the second mortgage.