Zombie mortgages are coming back from the dead. Their initial wave happened "after the recession in the fall of 2008," and now, "as home prices continue to soar, zombie mortgages are seeing a 'second wave,'" David Weber, a professor at the Creighton University School of Law, said to The New York Times.
Zombie mortgages — which are effectively second mortgages that homeowners had thought were settled — can cause some serious problems, from retroactive interest and racked up late fees to debt collections and possible foreclosure. Even scarier, said The New York Times, "a homeowner might have no idea that a secondary lender is on the title to their property."
What is a zombie mortgage?
Zombie mortgages "are second mortgages (home equity loans, 'piggyback' loans or home equity lines of credit) that were supposedly resolved long ago — either forgiven, modified or discharged in bankruptcy," said U.S. News & World Report. But in a plot twist down the road, "debt collectors are surfacing and claiming that they have the right to collect this debt and the right to foreclose and take the property if the debt isn't paid."
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How do zombie mortgages happen?
Often, zombie mortgages "arise when a homeowner falls behind on mortgage payments and vacates the home, assuming the bank will proceed with foreclosure," said CBS News. But instead, "with home values tanking during the most recent housing crisis, many lenders who held delinquent mortgage loans opted not to take the final steps to foreclose and take legal possession."
Another scenario where a zombie mortgage can occur is if "homeowners thought they concluded their second mortgage with a deed in lieu of foreclosure, but it was never recorded," or "they believed it was resolved in a short sale or discharged in a bankruptcy," said U.S. News & World Report.
A zombie mortgage can also result if "homeowners modified their first mortgage without realizing that their second mortgage wasn't part of the deal" — in other words, "the borrowers thought they only had to pay the first mortgage," said U.S. News & World Report.
How can you find out if you have a zombie mortgage?
One of the scariest parts of a zombie mortgage is that you could have one and not even realize it. If you have a bad feeling, there are a few ways to make sure you are in the clear:
Reference property records. One way to check is to look for your address in public property records and "see if there is a second mortgage against your home and a notice of default," said U.S. News & World report. Usually, if a mortgage is satisfied, you will "see a deed of reconveyance releasing the lien on your property."
Check your old tax filings. Your old tax filings can also give you a clue, as "forgiven loans are generally taxable," said U.S. News & World Report. So "if you didn't receive a 1099 indicating the amount of debt that the lender forgave, you could have a zombie mortgage."
Review any related paperwork. For those with mortgage modifications, look through any related paperwork to "see if your second mortgage was forgiven, and make sure that past-due amounts weren't wrapped into a new second loan," said U.S. News & World Report.
What should you do if you have a zombie mortgage?
If you get a collection notice, "your first step is to get more information," said Money. "Ask the creditor for details of the debt, including the amount and who you owe," and remember that "they are required by law to provide this in writing."
From there, it can be helpful to get in touch with an attorney to learn more about the laws and your protections. Depending on the state you live in, "even if you didn't pay off the loan, you still may not be responsible for the debt today," said Money. An attorney can also help you dispute the debt, or challenge it in court.
If you do owe the debt, consider negotiating a settlement or coming up with a plan to pay it off. Just make sure not to ignore it, David J. Greiner, a California-based lawyer, said to U.S. News & World Report, as that "can have severe consequences."
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