What Is a Zombie Mortgage?

What Is a Zombie Mortgage?

A zombie mortgage is a debt, often a second mortgage, that the borrower believed was forgiven but comes back to life years later. This can happen when a lender charges off the loan and sells it to a collection agency. You might assume it was taken care of through bankruptcy or a loan modification, or rolled into your first mortgage. In many cases, you don't even realize the second mortgage is still active—until a debt collector contacts you, claiming you owe the balance, plus interest and penalties.

If a debt collector contacts you with a valid and enforceable notice of debt, you may need to pay it or risk foreclosure. Collectors typically have six years—or longer in some states—from your official date of default to pursue payment on the debt. But as we'll see below, your course of action may depend on the validity of the claim and your state's laws.

Learn more: What Is Zombie Debt?

How Does a Zombie Mortgage Work?

With zombie mortgages, homeowners understandably don't believe they owe on a property they no longer live in or believe they own. For example, they may have gone through a foreclosure, moved out, or given up their home believing everything was settled. But in some instances, the foreclosure may have never been completed, and they remained the legal owner, unbeknownst to them. That's why it can be confusing to suddenly hear they still owe money on a property.

A zombie mortgage often follows this series of events.

1. Foreclosure is initiated. If you previously missed mortgage payments, your lender may have initiated foreclosure proceedings. But instead of finishing the foreclosure and taking back the home, they just let it sit. It might not have been financially worthwhile if the home's value was too low to justify the lender's costs of foreclosing.
2. The homeowner still legally owns the property. Many homeowners move out after receiving a foreclosure process notification. But sometimes your lender pauses or drops the foreclosure without notifying you. Since the title never changes hands, it remains in your name, often without your knowledge. That means you could still be legally responsible for the property.
3. The debt is sold or revived. At some point, often years later, the original lender sells the debt to a debt collector or collection agency.
4. The debt collector contacts the homeowner. After years of no activity on a home loan—often a second mortgage—a debt collector unexpectedly contacts you pursuing debt repayment or threatening foreclosure. Why now? In many cases, the home has gone up in value, or the first mortgage has already been paid off. In the latter case, the lien is released, and the second mortgage typically moves into first lien position. That means the second lender could now foreclose to recover the debt, and if no other liens remain, potentially take ownership of the property.
5. Legal action or threats begin. If you don't repay the debt or fail to follow an agreed-upon payment plan, you may face a lawsuit or renewed foreclosure efforts.
6. Foreclosure or settlement negotiations begin. Assuming the debt is valid and collectable in your state, you must decide whether to negotiate a settlement, agree to a loan modification or explore your legal rights. You might think you lost the property years ago, but the title could still be in your name. If so, you could risk losing your property for good through renewed foreclosure efforts.

How Did Zombie Mortgages Start?

Zombie mortgages began surfacing after the 2008 housing crisis. Back then, many homeowners had second mortgages, often as part of a piggyback loan which used the funds for the home's down payment. When property values collapsed, some borrowers couldn't keep up with the payments. Lenders started foreclosure proceedings to collect on the loans, but never finalized them. Others sold the mortgage to debt buyers. In either case, the title never changed hands.

Meanwhile, homeowners often assumed the second mortgage was forgiven, included in another loan or otherwise settled. In reality, however, they retained ownership of the title and were unaware this hidden liability existed.

Are Zombie Mortgages Common?

Statistics for zombie mortgages are hard to come by, likely because many homeowners are unaware they have one. A National Public Radio investigation found that over 500 second mortgages in Maryland that had been dormant for more than a decade have recently been reactivated and begun foreclosure proceedings. The report shows that while zombie mortgages aren't extremely common, more homeowners are dealing with them than you might expect.

Zombie mortgages are more likely to appear in areas where foreclosures were never finished. This includes neighborhoods where home values were once too low to justify the costs of foreclosure. But with home values rising in recent years, debt collection companies have been renewing foreclosures and reaching out to borrowers to collect on the debt.

Learn more: How to Find Out What Debts You Have in Collections

Signs You May Have a Zombie Mortgage

If you're not sure if your old second mortgage is truly gone, keep an eye out for these red flags.

• You never got final confirmation of home foreclosure. When a foreclosure sale is final, the title transfers to a new owner. If you never received confirmation of the transfer of ownership, you may want to follow up with your lender to check the status of the foreclosure.
• The second mortgage was never forgiven. If your lender forgave a second mortgage, you should've received a Form 1099-C from the IRS specifying the forgiven amount. When a lender cancels a debt, they typically send this form to you and the IRS because the forgiven amount is usually considered taxable income. If you never received a Form 1099-C, it may indicate your debt was never officially canceled.
• You start getting collection notices or legal threats. If a collector starts contacting you with claims you owe back mortgage payments, interest and fees, don't automatically assume it's a scam. It's possible the loan was never resolved.
• You're still getting property tax bills or city fines. If an old foreclosure was abandoned, the title likely never transferred to a new owner, and you could still be responsible for its debt, property taxes, HOA fees and more.
• You're getting zombie debts on your credit report. If you regularly check your credit report, you may notice a new entry from a debt collector. It could be listed on your report as a collection account, a new loan or a past-due balance on an old loan. These entries harm your credit and suggest the debt was never fully resolved.

Learn more: How Long Do Collections Stay on Your Credit Report?

How to Deal With a Zombie Mortgage

Zombie mortgages are legally valid, but you should still confirm the debt and collector are legitimate and take steps to resolve the issue.

• Confirm ownership and debt status. Start by contacting your original lender or loan servicer to check the debt status and whether the loan is still active. You'll also want to know if the debt collector is legitimate. Remember that under the Fair Debt Collection Practices Act, collectors must provide you with a debt validation letter within five days of their first communication requesting debt repayment. This letter should include basic information about the debt, including the name of the creditor, the collection agency's name and mailing address, the account number and the current amount owed.
• Gather documentation. Documentation always helps in legal matters, so you may want to contact your county recorder's office to see if the second mortgage was officially discharged.

Tip: If you're unsure who currently owns the loan, consider purchasing a title search—usually costing $75 to $200—which could reveal any active liens on your property. Look through your home records to see if you have tax form 1099-C showing the debt was canceled.

• Get legal or housing counseling help. If you're unsure about how to proceed, consider consulting an attorney with experience in consumer debt or real estate law to assess your options. If an attorney isn't within your budget, consider speaking with a HUD-approved housing counselor for guidance.
• Challenge the debt if appropriate. If you don't believe the debt is legitimate, you have 30 days from receiving the debt validation letter to dispute the debt in writing with a verification letter. If you need help, the Consumer Financial Protection Bureau offers several sample letters to help you respond effectively to a debt collector.
• Resolve or clear the title. There are several ways to resolve the debt and clear the lien from your title. If your home wasn't foreclosed on, you might be able to pay off the balance by borrowing against your equity or modifying your existing mortgage. Depending on how much you owe and your credit score, a personal loan of up to $100,000 may also be an option. If repayment isn't possible, a short sale or deed in lieu of foreclosure could help you avoid foreclosure.

Stay on Top of Your Credit to Catch Issues Early

When a zombie mortgage comes back to life, it can wreak havoc on your credit, especially if the collector reports it as a delinquent or collection account. These negative marks could cause your credit score to drop, making it harder to qualify for new credit.

If you suspect an old mortgage debt is affecting your credit, it's a good idea to find out exactly what's on your credit report for free with Experian. Check for a new mortgage or collection account on your report. Experian credit monitoring can also alert you to any new debt or account activity on your credit report, so you can catch issues like zombie mortgages early on.