What is a zombie second mortgage?
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“Zombie” mortgages are mortgage debts that you might have thought were forgiven or satisfied long ago but that still exist.
Old debts can be written off by the lender and sold for pennies on the dollar to debt collectors. Sometimes the mortgage company goes silent and stops sending statements or communicating with you altogether. Years later, a debt collector reaches out to collect on the debt. Because these mortgages seem to reappear after being considered “dead” or gone for so long, they’re sometimes called “zombie” second mortgages.
Why did some borrowers have second mortgages on their homes?
Before the Great Recession in 2008, mortgage lenders sometimes gave borrowers two mortgages for the same property, instead of one. For example, a primary mortgage (recorded in the courthouse first) might cover 80% of the purchase price, and a second mortgage (recorded in the courthouse after the first mortgage) covered the remaining 20%. Sometimes the second mortgage was taken out as a home equity loan after the house was purchased.
As the Great Recession hit and home values shrank along with the economy, some people had trouble making mortgage payments. When a borrower defaults on a second mortgage, the mortgage holder can sometimes start foreclosure even if the borrower is current on the first mortgage. But, for business reasons, some second mortgage holders charged off their defaulted loans as uncollectible and stopped communicating with borrowers. Some sold the loans to debt buyers without telling the borrower. Some borrowers, because they received no notices or periodic statements for years, thought their second mortgages had been modified along with the first mortgage, discharged in bankruptcy, or forgiven.
Now, years later, as borrowers have paid down their first mortgages, some are hearing from companies that say they own or have the right to collect on a long-dormant second mortgage. As property values rise, mortgage holders who bought these second mortgages—and their debt collectors—are threatening foreclosure and other collection actions. Some of these debt collectors demand the outstanding balance on the second mortgage, plus fees and interest, and some threaten to foreclose if the borrower does not or cannot pay.