In recent years, a troubling trend has emerged in the real estate world: the revival of “zombie” second mortgages. These are dormant loans, often forgotten or deemed forgiven, that have come back to haunt homeowners in the form of massive debt and even foreclosure.
The history of second mortgages in the United States is closely tied to the housing boom of the early 2000s. At this time, homeowners were encouraged to take out multiple loans to finance their homes—typically a first and second mortgage. These second mortgages were viewed as a positive alternative for individuals who could not afford to make a down payment in cash.
In 2008, as home prices plummeted, and millions of homeowners were left underwater—owing more than their homes were worth—many found themselves struggling to keep up with mortgage payments. In response, the federal government introduced various relief programs, including loan modifications under the Home Affordable Modification Program (HAMP), which aimed to make mortgages more affordable and prevent foreclosures. Individuals facing financial hardship received assurances from lenders that their second mortgages would either be modified or, in some cases, outright forgiven. Many stopped receiving statements or updates from their second mortgage lenders and thus assumed the second mortgage had been taken care of.
Almost two decades later, as the housing market has recovered and home prices have risen, these “forgiven” second mortgages are returning to suffocate over ten thousand homeowners in the United States today. Economists from Planet Money and NPR explain that the “zombie” second mortgage is the recent activity of investors and debt collectors who are aggressively going after the second mortgages that many homeowners believed were forgiven. Collectors are buying these second mortgages from investors for a fraction of their original value, raising interest rates and then forcing individuals to foreclose on their homes because of their outstanding debt. In most cases, monthly statements were never prepared or distributed to borrowers, leaving them unaware of their rising debt. Kristi Kelly is a consumer protection attorney in Fairfax, VA who has worked with several homeowners to fight against these collection agencies and prevent foreclosure. Kelly views the situation as a huge injustice, noting that even “very sophisticated people” are unaware that a second mortgage company could foreclose on their homes if they do not take action to stop it.
One key element in these cases is the issue of missing monthly statements. Under the Truth in Lending Act (Regulation Z), mortgage companies are required to send monthly statements to homeowners if there is interest accruing on a loan. However, many homeowners with zombie second mortgages have not received such statements for years. According to Kelly, this oversight can provide homeowners with an opportunity to fight back: “In some ways, the greed of these second mortgage holders has given people leverage in their cases, because it’s just not good enough to collect the value of the note, and they want to get every last dollar and take every dime of equity. They then open themselves up to serious legal consequences and provide consumers the leverage they need to stay in their homes.”
The rise of zombie second mortgages underscores ongoing risks for homeowners, even as the housing market has rebounded. It’s a reminder of the long-lasting impact of the housing crisis and the importance of staying vigilant about financial obligations. Homeowners facing such situations should seek legal advice to protect their interests.