Law Firms Pursue Property Owners Over Unpaid Zombie Mortgages
Law firms across the country are targeting property owners with threats of foreclosure for unpaid second mortgages, commonly known as zombie mortgages. These claims arise from old debts that many homeowners thought were resolved or couldn't pay due to lender disappearances during the 2008 mortgage crisis.
The Story of a Zombie Mortgage
One property owner’s experience highlights the issue. In 2007, he converted a small house into a commercial structure, securing both a first and second mortgage. By 2009, the real estate market had collapsed, and the company servicing his second mortgage vanished. Despite his attempts to make payments, he received no response. Years later, a law firm claimed to represent a company that had bought his second mortgage, demanding full payment and threatening foreclosure.
Legal Expert Explains the Phenomenon
A real estate attorney from Hanford, Calif., explains that these situations are becoming increasingly common and are a major concern for property owners. He outlined two scenarios where zombie mortgages typically arise:
Bankruptcy Misconception: Many homeowners believe that including a second mortgage in a bankruptcy filing absolves them of responsibility. However, mortgage debt is generally not dischargeable through bankruptcy, leaving the lien on the property intact. The lender retains the right to foreclose unless the debt is paid off or restructured.
Disappeared Lenders: In some cases, the lender servicing the second mortgage disappears, making it impossible for the homeowner to continue payments. Despite the inability to make payments, the debt remains owed.
The Real Estate Crisis Aftermath
The 2008 mortgage crisis led to a wave of foreclosures and plummeting property values. During this period, holders of second mortgages often refrained from foreclosing due to low property values and limited equity. As real estate prices recovered, these second mortgages became valuable again, prompting new mortgage holders to enforce them and potentially seize properties.
The Issue of Debt Buyers
Zombie mortgage debt is often acquired by debt buyers who purchase defaulted assets for a fraction of their value. These buyers then attempt to collect the full amount owed, which can be highly profitable. This practice, akin to legalized extortion, has been criticized for its harsh impact on unsuspecting property owners.
Advice for Affected Property Owners
If faced with a zombie mortgage situation, property owners are advised to:
Contact the customer service department of a title or escrow company for assistance in locating the current mortgage holder.
Reach out to federal lending agencies like Fannie Mae and Freddie Mac for information on lenders and their successors.
Create a savings account to set aside the equivalent of monthly mortgage payments, providing negotiating leverage if the debt resurfaces.
Consult a real estate attorney immediately to navigate the complex legal landscape and protect their property rights.
By taking these steps, property owners can better prepare for and potentially mitigate the impact of zombie mortgages.
