What is a Zombie Mortgage

Like a jump scare in a horror movie, a zombie mortgage will appear suddenly and affect many American homeowners. To fully understand their complexity, we must consider the financial crisis of 2008, which led to the Great Recession. During this time, the rise of subprime loans skyrocketed. For example, the 80/20 loan allows homebuyers to use one loan for the primary amount and the second 20% as a down payment. In many cases, the borrowers can’t afford the home they wanted, Yet unscrupulous lenders capitalized on a lucrative lending market. Most of these borrowers defaulted on the mortgage, and the house was foreclosed. In essence, zombie mortgages occur when home equity loans and second mortgages become challenging to pay during hardship. 

As the economy plummets, interest rates change, home values drop, and borrowers struggle to keep up with their monthly payments. As a result, homeowners often resort to credit cards and making minimum payments. In these times, financial institutions fear catastrophic loan foreclose numbers. As a solution, they write off the losses from second mortgages hoping the first mortgage stays current.

Eventually, real estate and home prices stabilize, and creditors come out of the woodwork to collect. In reality, the original mortgage company sold borrowers’ second loans to debt buyers who demanded the original loan amount and tacked on late fees and foreclosure threats when borrowers least expected it.

Let’s get tactical and bring to light zombie mortgages and their impact on homeowners, uncover resources to help, and ensure preparedness.

The Impact of Zombie Mortgages on Homeowners

According to the Consumer Protection Financial Bureau, zombie mortgages are resurging. The significant impact on homeowners is foreclosure risk. It’s undoubtedly scary and unsettling when mortgage holders resurface with old debts that borrowers thought were free from, namely because the effects of a recession and inflation are already taxing. Since financial hardships are confusing, professional or legal representation is wise. Considering the long-term damage to credit scores, future loan approvals depend on high credit scores.

Are Zombie Mortgages a Threat Today?

According to the CFPB, they are “Monitoring the market to ensure that companies don’t attempt to evade federal consumer financial laws. For example, the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) and their implementing regulations generally require mortgage servicers to provide homeowners with periodic statements and notices of ownership and servicing transfers.

Charging off a loan does not generally exempt servicers from providing periodic statements unless homeowners are provided with proper notice of the charge-off and the servicer, stops charging any additional fees or interest. In addition, mortgage servicers must make ongoing good-faith efforts to establish live contact with delinquent homeowners. Many individuals and entities that seek to collect on these defaulted loans are debt collectors as defined by the Fair Debt Collection Practices Act (FDCPA). In an April 2023 advisory opinion, the CFPB issued guidance that debt collection activities on zombie second mortgages may violate the FDCPA and its implementing regulation. These protections apply regardless of the age of the loan.”

If you have had a problem with mortgage servicing, you can submit a complaint with the CFPB.

Knocking Out a Zombie Mortgage in 6 Steps

1. The first step in battling a zombie mortgage is contacting the Consumer Financial Protection Bureau (CFPD). Directed by Rohit Chopra, the CFPB actively monitors the rise of zombie mortgage debt. Forthwith, they regulate mortgage servicers and debt collectors with laws like the Fair Debt Collection Practices Act (FDCPA).
2. The second step is verifying the debt. Under the FDCPA, homeowners can request debt validation through a letter from the lender or debt collector.
3. Thirdly, since state laws vary, debt collection governance differs. Check the statute of limitations to see if the debt is legally enforceable. For example, California and New York have intricate laws regarding mortgage loan payback from borrowers.
4. The fourth step in knocking out a zombie mortgage is hiring a professional. When facing foreclosure actions, consult with an attorney without reservation. Although mortgage foreclosure notices are scary, determining potential defenses and knowing your rights is essential.
5. Coming in fifth, request a loan modification if the debt is valid and the borrower is liable for the entire loan and fees associated with late payment. Regularly, debt collectors work with borrowers to recoup debt quickly, and manageable mortgage payments help.
6. Lastly, Homeowners who face unfair practices or endure unethical treatment, such as aggressive tactics and deception, can file complaints with the CFPD and the state Attorney General.

Best Defense Against Zombie Mortgages – Best-Practice Lenders

The trending rise of zombie mortgages in the current market is eyebrow-raising. Especially considering the current impact inflation has on the economy and property values. The upshot is that homebuying professionals offer insight to borrowers about the past’s impact on America and the housing market. Learning to protect and safeguard from the potential risk of foreclosure or loan default is a breeze with informed professional advice.

In the end, preparedness and partnering with trusted mortgage lenders ensure homeowners can navigate this complex issue and ensure their financial stability.

Let’s connect.

The steps are simple:

1. Schedule a Call: An experienced loan officer can discuss your lending needs and guide you through the possibilities.

2. Get Approved: We’ll help you through the mortgage application process and facilitate the steps for approval.

3. Exhale: Put your feet up and feel secure knowing you made the best decisions about your home loan.

With proper guidance, you can get your first home, accommodate your growing family, and start that renovation project—whatever goal is on the horizon. An alliance with Mortgage Insiders will give you the confidence to know that your mortgage loan is setting you up for financial success. Mortgage Insiders offers today’s latest financial news and mortgage trends. Check out our channel for current events.