Yes, You Should Be Very Afraid of “Zombie Mortgages”

Although they sound like they belong in a horror film produced by Zillow, it turns out “zombie mortgages” aren’t the stuff of movies. Not only are they very real, but they can also come back to haunt homeowners with inflated fees and potentially cause liens to put home sales in limbo.

So, what exactly are zombie mortgages?

“Zombie mortgages are those loans that linger in limbo, neither fully paid off nor foreclosed upon,” explainsMichael Ryan, who has three decades of experience as a financial planner and coach. “They arise when a homeowner defaults on their mortgage, but the foreclosure process gets stuck or delayed for various reasons.”

Oftentimes, the consumer thinks the debt was satisfied long ago, and now debt collectors are coming back and threatening them with hefty late fees and interest charges.

Concerned about predatory mortgage practices, the Consumer Financial Protection Bureau, or CFPB, issued guidelines to debt collectors onzombie mortgages in April, saying it’s illegal for debt collectors to sue (or even threaten to sue) to collect debts that are past the statute of limitations. Statute of limitations on debt collectionsvary by state, but are usually in the three- to six-year range.

“Some debt collectors, who sat silent for a decade, are now pursuing homeowners on zombie mortgages inflated with interest and fees,” CFPB director Rohit Chopra said in a press statement. “We are making clear that threatening to sue to collect on expired zombie mortgage debt is illegal.”

The CFPB took up the issue of zombie mortgages because they’ve seen an uptick of debt collectors trying to foreclose on “silent second mortgages” that homeowners thought were satisfied long ago. You see, leading up to the 2008 subprime mortgage crisis, lenders relied on predatory practices that locked homebuyers into mortgages they couldn’t repay, withadjustable rate mortgagesthat ballooned after introductory periods.

The CFPB is particularly concerned about piggyback mortgages (i.e., 80/20 loans) that involve a first lien loan for 80 percent value of the home and a second lien for the other 20 percent. With these loans, lenders didn’t go after homeowners on the second liens, instead selling them to debt collectors. But more than a decade later, some lenders are coming back to homeowners (many of whom were able to stay in their homes) and telling them to pay up on the mortgage balance, interest, and fees and threatening them with foreclosures.

Zombie mortgages can also refer to a scenario where homeowners move out of their properties after a foreclosure notice, but the foreclosure is not yet complete and the property remains in their name, explains Lauren Mendoza, a CPA and founder ofBank Standard,a business loan marketplace. Zombie titles can cause all kinds of financial complications.

So, say you didn’t own a home back during the financial crisis. Should you still worry about zombie mortgages? Maybe.

Homebuyers can make sure they’re not affected by a zombie mortgage by thoroughly checking the property’s title before purchasing a home, Mendoza says. Title searches are among the fees that buyers pay for in theirclosing costs. The search,which costs around $125 to $250, helps confirm the property’s legal owner and, if you’re taking a loan out to buy your own, you can expect your mortgage company to require this process. If a lien pops up (often because the current owner owes creditors), it could delay or cancel the transaction.

That’s why it’s important to engage a reliable title company to confirm that the property has no lingering claims, Mendoza says, even if you’re buying a property with cash.