Zombie Mortgages Come Back to Haunt Property Owners
Here’s what to do if a letter from a law firm arrives out of the blue to warn you that you could lose your house over a mortgage you thought was long dead.
Like ghosts in a haunted house, law firms are pursuing property owners, threatening them with the loss of their property for unpaid second mortgages — known as zombie mortgages.
Some people thought their mortgages were discharged in bankruptcy. Others wanted to pay on their mortgages but couldn’t because there was no longer anywhere to send their payments when their lenders disappeared during the mortgage crisis that started in 2008.
Andy’s story of being blindsided by a zombie mortgage is typical. Here’s how it went down.
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How the zombie mortgage got its start
“In 2007, I converted a small house into a commercial structure for our data recovery company,” “Andy” wrote. “There was a first and second mortgage, and I am still current on the first. Around 2009, when things fell apart in real estate, the company servicing my second just vanished! I tried mailing and even wiring payments, but everything came back. I was unable to discover who to pay. Then a letter from a law firm in Florida arrived, claiming to represent a company that had purchased my second mortgage, stating that I was in default, demanding payment in full, or they would foreclose and take my office!”
A real estate attorney explains what happened
I ran Andy’s situation by Hanford, Calif., real estate attorney Ron P. Jones, who says he is “far more familiar with these situations than I would like to be, as they are terrifying to people who are suddenly at risk of losing their home.”
He explained how and why this is happening even today, so many years after the Great Recession.
“Zombie second mortgages step out of the past, haunting property owners and threatening their ability to remain in their home or commercial building,” Jones says, describing two common situations where this occurs:
Situation No. 1: You filed for bankruptcy.
“Many property owners were under the impression that by including the second mortgage in a bankruptcy, they were no longer responsible for it,” Jones says. “They keep the first current, but stopped paying on the second.” But in reality, the lender still has a lien against the property. Mortgage debt (secured debt) generally is not dischargeable through bankruptcy. You do not own the home free and clear, so you are not off the hook for the mortgage. “So, whoever owns the mortgage has the right to foreclose unless you pay it off or negotiate an acceptable restructuring.”
Situation No. 2: The lender has disappeared, and you can’t make payments.
“As strange as it sounds,” Jones says, “the fact that you were unable to keep payments current on the second mortgage does not mean that the money isn’t owed. It is owed.”
Why is this happening all across America?
We can all recall the tsunami of foreclosures and prices of homes and commercial property falling off the face of the planet from the crash. As the value of their homes fell well below what was owed, many people just walked away.
“During those years, holders of second mortgages did not foreclose due to falling home values and little equity in the property,” Jones notes.
When real estate prices started to recover, and in some cases went even higher, that second mortgage suddenly is very valuable and worth trying to enforce, giving a successor mortgage holder a “winning lottery ticket,” enabling them to potentially own the property encumbered by the mortgage.
What about Andy’s situation? It just seems so unfair. He was trying to pay, but could not locate anyone to take his money, and then, blam, he’s threatened with losing the property. What happened?
Meet the zombie mortgage debt buyers
Attorney Jones explains that the same thing happens with mortgage debt that is in default: “Assets of a defunct lender are purchased for pennies on the dollar by one of these debt buyers. So, if $100,000 is owed, the debt buyer might pay 4% to 10% of that amount and gets the opportunity to collect $100,000. Many describe this as legalized extortion. I concur.”
I’ve written about “zombie consumer debt,” where so-called uncollectible/written-off accounts are purchased for cents on the dollar by a debt buyer who then goes about trying to collect from a consumer. It is a hugely profitable, murky business.
What to do if this happens to you
So, if you are in a similar position as Andy, what should you do? Jones recommends:
- Contact the customer service department of a title or escrow company. They have extensive resources on mortgage companies that have failed and might be able to locate who to pay.
Reach out to federal lending agencies such as Fannie Mae and Freddie Mac, which also have information on lenders and their successors. - Create a special savings account and deposit each month the same amount you would have paid on the mortgage. That way, when zombies show up, you have negotiating ability.
- Immediately contact a real estate attorney. Don’t handle this on you own!
Dennis Beaver practices law in Bakersfield, Calif., and welcomes comments and questions from readers, which may be faxed to (661) 323-7993, or e-mailed to Lagombeaver1@gmail.com. And be sure to visit dennisbeaver.com.
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