What Are Zombie Mortgages?

A zombie mortgage is a secondary home mortgage that you may have forgotten about, that lenders could attempt to collect. 

Like a zombie returning from the dead to chase you, a zombie mortgage is a second home mortgage you may have forgotten about or thought was forgiven. Zombie mortgages first gained notoriety during the 2008 Great Recession, but they are in the news again because of an increase in second mortgages. Read on to understand zombie mortgages and what to do if you find out you have one. 

What Is a Zombie Second Mortgage?

A zombie mortgage is a second mortgage, including home equity loans, piggyback loans, or home equity lines of credit that the homeowner thought was resolved, forgiven, modified, or discharged. However, with a zombie mortgage, the debt is still valid, and a debt collector could contact the homeowner to collect the balance due. 

Why the mortgage wasn't resolved or forgiven could happen for various reasons, from the homeowner believing the debt was forgiven to poor record-keeping if the debt was paid. If debt collectors are attempting to collect on the zombie mortgage, they could have the right to either collect the debt or foreclose on the property to recoup the lent amount. 

What Causes Zombie Mortgages?

Zombie mortgages occur for various reasons. The most common reasons why a mortgage may become “zombified” include:

Modified first mortgage

If you modify your first mortgage and don't realize the second mortgage wasn't part of the deal, you might mistakenly think you only need to pay the first mortgage. This often happens when you have the same lender for the first and second mortgages and assume the modification will include both mortgages. 

In this case, if you stop making payments on a second mortgage and the lender doesn't foreclose, then you might think the mortgage is resolved. 

Unrecorded proceedings

If you opt for a deed in lieu of foreclosure on your second mortgage and it was never recorded, you could also find yourself with a zombie mortgage. The same is true if you believe that a short sale, short refinance or discharged debt in a bankruptcy resolved the second mortgage, but it didn't.

In those cases, if the property is sold, nothing secures the second mortgage. However, the lender on the second mortgage could still attempt to collect the loan.

Wrong filings

Mistakes can happen. Paperwork can be neglected or misfiled, or in rarer cases, shady dealings occur. You could be faced with an unwarranted zombie mortgage in all of those cases.

How Does a Zombie Mortgage Affect Homeowners?

The term zombie mortgages emerged during the 2008 housing crisis and recession. Subprime lending practices led to many homeowners' inability to pay their mortgages. Additionally, dropping home prices left many homeowners with negative home equity, creating a situation ripe for preforeclosure or foreclosure. 

Zombie mortgages can have severe negative consequences for homeowners. According to a May 2024 NPR report, more than 10,000 people in several states have recently gotten foreclosure notices over what appear to be old zombie second mortgages.

In addition to the risk of losing your home through foreclosure, it can affect the homeowner's credit score and even property value. 

How Can You Tell if You Have a Zombie Mortgage?

To determine if you have a zombie mortgage, perform a title search. You can check the property title for what encumbrances or liens are listed on the document. You can also check the deed. You can do this directly with the county clerk's office, county recorder, real estate lawyer, or title company. 

Title information is public, and you can often search for it online. You can search for your address and see if there is a second mortgage against your home or a notice of default. If the mortgage has been satisfied, you might also see a deed of reconveyance releasing the lien on your property.

You can also check your old tax filings. Since forgiven loans are usually taxable, if you don't have an IRS Form 1099-C, your debt probably wasn't forgiven and you could have a zombie mortgage. If you do, you can see how much was forgiven to confirm that it can't be resurrected. 

You can also check old paperwork for loan modification details, check if your second mortgage was forgiven, and confirm that past-due amounts weren't wrapped into a new secondary loan.

What to Do About a Zombie Mortgage

If you discover you have a zombie mortgage, there are several immediate steps to take. First, avoid discussing it, admitting to it or negotiating it with the collector. Instead, hire a trusted lawyer to help you with the zombie mortgage. Whether it's due to an incorrect filing or a second mortgage you thought was resolved, a lawyer could help you challenge it in court. You should be able to get the fees and interest waived, and if it's inaccurate, you might be able to get the entire second mortgage just removed from the title.

Ways to Overcome a Zombie Mortgage

Here are the other options you have to overcome a zombie mortgage. Quiet title action allows you to eliminate uncertainties over property rights when dealing with zombie mortgages. You can also consider the following:

Title Action Statutes of Limitations

Statutes of limitations prohibit collection actions for debt after a specific time. With zombie mortgages, that's usually six years after the borrower's default date. However, each state has its statutes of limitation for debt, and types of debt often have different limits within a state. 

In general, an old second mortgage may not be collectible after the statutory period has passed, typically after six years. But there are additional complications. Some states count each late payment as its debt, and some states have no statute of limitations for mortgage debt. Therefore, it's best to speak with a real estate attorney to understand your state's statute of limitations and what it means for zombie mortgages. 

The FDCPA

The Fair Debt Collection Practices Act governs debt collectors. This prevents collectors from deceptive or manipulative tactics of collecting debt they're not entitled to, such as time-barred debt. For that reason, if a debt collector calls you, don't confirm whether the debt belongs to you or whether you have any debt. Do your research outlined above, and if necessary, speak with a lawyer to protect yourself from predatory collectors who may not have records proving that you owe money or that they have the right to collect from you.

Mortgage Law: Tila And Respa

Finally, the Truth in Lending Act and the Real Estate Settlement Procedures Act are designed to protect mortgage borrowers and include provisions to inform them. 

This includes notifying borrowers when:

• The right to collect their loan payments is transferred or sold.
• The loan has been charged off or reactivated for collection.
• The loan is in arrears, and periodic statement disclosures must be provided.

Additionally, these laws can limit the added interest and penalties a collector is entitled to if they don't meet all stated requirements.

However, a collector that doesn't comply with TILA is in technical violation, and may have to pay a fine. But the borrower would have to prove damages resulting from the violation to have any other effect on the zombie mortgage or debt collection.

Find the Best Mortgage Lenders From Benzinga’s Top Providers

If you're ready to refinance or get a new mortgage, Benzinga's top providers can help. Start comparing the best offers today. 

Final Tips To Fight Zombie Mortgages

If you're faced with a zombie mortgage, you should do your own research and enlist a trusted attorney's help. Don't discuss it with the collector or admit to it. Instead, request proof that you owe the debt or that the collector has the right to contact you, which is called a debt validation letter. The Consumer Financial Protection Bureau has examples and additional support. 

Regardless of why you're faced with a zombie mortgage, don't ignore it. Consider paying, negotiating, or disputing the debt. With the help of a trusted lawyer, you could protect your property, clear the debt, and move on without worrying about new zombie debt emerging. 

If you need cash fast, you can also find ways to get $5,000 fast, $1,000 fast, or consider debt consolidation loans to take control of other debt and rebalance your budget. Finally, get tips to save on a low budget to build your emergency fund and pay down extra debt. 

Frequently Asked Questions