The term sounds like something out of a horror movie. And for many homeowners, the prospect of losing their homes due to so-called “zombie mortgages” is quite scary.
But thousands of Americans are facing that possibility today, thanks to a combination of opportunistic vendors amid a housing boom and confusion over the status of long-ago loans.
The origin of the problem dates back roughly two decades to the housing bubble of the mid-2000s. Lenders offered prospective homebuyers two mortgages in the form of 80/20 loans, with the second 20% mortgage taking the place of a down payment.
A few years later, amid the housing market crash during the 2008 financial crisis, the government began advocating for loan modifications on mortgages to curb the increase in foreclosures. For many people, that meant their 20% mortgage was forgiven — or so they thought.
Instead, the lenders frequently sold the loans to debt collectors at a fraction of the price, often without homeowners knowing. Now, the collectors are seeking payment of the zombie mortgage — a loan homebuyers thought was dead — along with interest and other fees accumulated over time.
An NPR investigation found more than 10,000 people in New York alone have received foreclosure notices over second mortgages in the past two years. The homeowners are faced with the choice of either repaying the loans, in some cases hundreds of thousands of dollars, or losing their house.
The situations has led to confusion for homeowners, who assumed — and in many cases were told explicitly by lenders — that they no longer had to repay their second mortgages after the loan modification. Some reported receiving foreclosure warnings by mail and telephone but believed them to be scams.
Fighting back
Fortunately for those at risk of losing their home, lawyers have been hard at work searching for ways to fight this relatively new real estate trend. And one legal statute cited by NPR has at least provided a temporary reprieve to the foreclosure process.
According to Virginia-based attorney Kristi Kelly, Regulation Z of the Truth in Lending Act requires companies to send monthly statements for any interest assessed on a mortgage. In most instances, Kelly said, these statements never arrived, and the collectors are now looking to retroactively tack on the interest fees.
Exploring legal options to fight zombie mortgages is one such strategy for homeowners who are unable to pay off their remaining loan or unwilling to sell the home. A CBS News story also suggests trying to negotiate a settlement, resulting in a lower, lump-sum payment than the total mortgage and interest.
