A Real Zombie Problem?
Ernie Neve, CPA
July 29, 2021
Despite what the movies would have you think, there’s a very real zombie problem in the United States that only a few people understand BUT one that can have a hugely negative impact on homeowners.
I know how it sounds, but the reality is this: in the Great Recession, many mortgage companies who held second positions on mortgages went bankrupt. Those assets were purchased for pennies on the dollar and now, years later, the companies that own those second mortgages are demanding payment of homeowners who – technically – are in default on second mortgages, even after they might have claimed bankruptcy.
Here’s how it works:
A homeowner with a second mortgage in the midst of the Great Recession continues to try to make payments to a now-defunct mortgage business. Try as they might, the payments come back, the wire transfers don’t go through, and they eventually give up trying.
…But the debt never went away.
Somebody purchased that debt and now that home prices have bounced back, the companies that own that debt are stepping up and demanding payment in full or they will foreclose. In a nutshell, that’s a Zombie Mortgage.
These come down to two main scenarios – one, which I mentioned above, was where the company that owned the mortgage simply disappeared and the homeowner couldn’t make the payments.
The other – somewhat more common – situation is where the homeowner went bankrupt and assumed they were no longer responsible for it. In reality, the lender still has a lien against the property. Mortgage debt (secured debt) generally is not dischargeable through bankruptcy, so the homeowner is not off the hook for the debt. Whoever bought the second mortgage can demand payment of the debt.
Here’s the deal – you’re the only one who knows whether the second mortgage on a property was paid or unpaid.
You know what you did or didn’t do, and that’s not the important thing here. What is important is this – if you just quit paying, you’ve got a potential problem, and that problem may – or may not – ever show up.
IF it does, it will show up as a registered letter from an attorney, likely stating how you are in default on the second mortgage and demanding payment in full for the past due amount. (Remember, that could be more than a decade of principal and interest…)
So what do you do?
Well, first and foremost, contacting the customer service department of a title and escrow company, or even Fannie Mae and Freddie Mac, to tap into their resources about mortgage companies that have failed and what companies might have purchased the assets can help tell you who to pay.
It’s also a no-brainer to create a special savings account and deposit each month the same amount you would have paid on the mortgage. That way, when zombies show up, you have negotiating ability.
Lastly, I would begin to look for – and find – a top-notch real estate attorney to discuss your options, even if you haven’t been contacted by anyone trying to collect the debt. Zombie mortgages are in a very murky arena of real estate and banking law, and it’s not everyone who knows how to fight these battles.
The truth is, Zombie mortgages are a numbers game, and the companies that try to collect these funds aren’t looking for their day in court – they’re looking for money. The law is technically on their side, so they have a “winnable” case, but you have to be prepared, too.