‘Zombie’ Mortgages Come Back to Haunt Property Owners after Great Recession
A letter from a law firm arrives out of the blue, warning that you could lose your house over a mortgage you thought was long dead. It’s happening all of the country, and here’s what to do if it happens to you.
Like ghosts in a haunted house, law firms are pursuing property owners, threatening them with the loss of their property for unpaid second mortgages — “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 a few years back.
Andy’s story is typical.
2007: Andy Converts a House into a Small Office
“In 2007 I converted a small house into a commercial structure for our data recovery company. There was a first and second mortgage, and I am still current on the first,” he wrote.
“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.
“Earlier this year 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!
“How can this be? What do you recommend?”
A Real Estate Attorney Explains What Happened
I ran Andy’s situation by Hanford, Calif., real estate attorney Ron Jones who 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 the how and why this is happening, 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: Years after a bankruptcy
“Many property owners were under the impression that by including the second mortgage in a bankruptcy they were no longer responsible for it. They keep the first current, but stopped paying on the second. 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. You are not off the hook for the mortgage.
“So, no payments? 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, the fact that you were unable to keep payments on the second current does not mean that the money isn’t owed. It is owed.”
Why Is This Happening Now, 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.
“Today, prices of real estate have recovered to pre-crash levels and in some instances, even higher. Whereas a second mortgage had little practical value years ago, now it 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.”
I asked Jones, “But what explains Andy’s situation? It just seems so unfair. Here, 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? Who are these guys anyway?”
Meet the Zombie Mortgage Debt Buyers
I’ve written about “zombie consumer debt,” where so-called “uncollectible/written off” accounts are purchased by a debt buyer, for cents on the dollar, who then goes about trying to collect from a consumer. It is a hugely profitable, murky business.
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 $100K. Many describe this as legalized extortion. I concur.”
So, if you are in a similar position as Andy, what should you do? Jones recommends:
- Contacting 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.
- Federal lending agencies, such as Fannie Mae and Freddie Mac, 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!
About the Author
Attorney at Law, Author of "You and the Law"
After attending Loyola University School of Law, H. Dennis Beaver joined California's Kern County District Attorney's Office, where he established a Consumer Fraud section. He is in the general practice of law and writes a syndicated newspaper column, "You and the Law." Through his column he offers readers in need of down-to-earth advice his help free of charge. "I know it sounds corny, but I just love to be able to use my education and experience to help, simply to help. When a reader contacts me, it is a gift."