Zombie mortgages are making a comeback. The first wave occurred “after the fall of 2008 recession,” and now “we're seeing a second wave of zombie mortgages as home prices continue to soar,” David Weber, a professor of law at Creighton University, told The New York Times.
Zombie mortgages are effectively second mortgages that homeowners thought they'd paid off, and they can cause serious problems, from back-paying interest and increasing late fees to possible collections and foreclosure. Even scarier, according to a New York Times report, “homeowners may not even know that a second lender has a title to their property.”
What is a Zombie Mortgage?
A zombie mortgage is “a second mortgage (home equity loan, piggyback loan, or home equity line of credit) that has supposedly been forgiven, modified, or discharged in bankruptcy,” according to U.S. News & World Report. But then, in an unexpected twist, “collectors show up, claiming the right to collect the debt and to foreclose and seize the property if the debt isn't paid.”
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How do zombie mortgages come about?
Zombie mortgages often occur when “homeowners fall behind on their mortgage payments and vacate their homes with the assumption that the bank will proceed with foreclosure,” according to CBS News. But in reality, “as home prices plummeted during the recent housing crisis, many lenders with delinquent mortgages chose not to take the final steps of foreclosure and legal possession.”
Another scenario in which a zombie mortgage can occur is when “homeowners thought they had entered into a second mortgage with a deed in lieu of foreclosure but it wasn't recorded” or “believed it had been resolved in a short sale or discharged in bankruptcy,” U.S. News & World Report says.
Zombie mortgages can also occur “when a homeowner modifies their first mortgage without realizing that the second mortgage wasn't part of the deal” — in other words, “when a borrower thinks they only need to pay the first mortgage,” according to U.S. News & World Report.
How do you know if you have a zombie mortgage?
One of the scariest things about zombie mortgages is that you may not even know you have one, so if you have a bad feeling about it, there are a few ways to make sure you're in the clear.
Check property records. One way to check is to search public property records for your address and “see if there are second liens and notices of default against the home,” U.S. News & World reports. Usually, once the mortgage is satisfied, “you'll be able to find a reconveyance deed that releases the lien against the property.”
Check your past tax returns: Past tax returns can also provide clues. According to U.S. News & World Report, “forgiveable loans are generally taxable,” so “if you haven't received a 1099 showing the amount of debt forgiven by the lender, you may have a zombie mortgage.”
Check the relevant documents: If you have a mortgage modification, review all the relevant documents to “see if your second mortgage has been forgiven and make sure any past-due payments aren't included in the new second loan,” says U.S. News & World Report.
What to do if you find yourself with a zombie mortgage?
If you receive a collection letter, “the first thing to do is get more information,” Money says. “Ask the creditor for details about the debt, like the amount and who owes it,” and remember that “creditors are required by law to provide this in writing.”
From there, it may be helpful to speak with an attorney to learn more about the laws and protections. Depending on the state you live in, “even if you haven't paid off the loan, you may still not be currently responsible for the debt,” says Money. An attorney can help you contest the debt or challenge it in court.
If you owe money, consider negotiating a settlement or working out a repayment plan, but don't ignore your debt because “it can have serious consequences,” California attorney David J. Greiner told U.S. News & World Report.
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