After the Great Recession, Zombie Mortgages Back to Haunt Distressed Homeowners

There are lots of homeowners today who firmly believe or think that their loan mortgages were discharged in bankruptcy, while there are others who despite wanting to continue paying, cannot do so, since there was no longer anywhere to send their payments after their lenders disappeared during the financial crisis some years ago. And because of these circumstances, they tend to be complacent about their situation, until law firms begun pursuing property owners and threatening them of losing their property for the unpaid second mortgages or “Zombie Mortgages.”

Law firms, like a ghost in horror movies, will haunt homeowners for the unpaid second mortgage. A lot of property owners are in for a surprise when a letter from a law firm arrives out of the blue. The letter warns them that they could be forced out of their home over a mortgage that they thought was long dead. It is happening across the country and here is what you could do if you are at the receiving end.

 A typical scenario nowadays

In 2007, Chris, your regular Joe decided to turn his modest home into a commercial space for their start-up company. He had two mortgages, and he was on the first one yet. Two years later, things seem to be falling apart in the real estate business, and the lending company servicing his second loan seemed to have disappeared and vanished in thin air. Chris tried many times to contact or find the company servicing this loan but was unable to discover who to pay.

Fast forward, Chris had the biggest surprise of his life when a letter from a law firm suddenly appeared right in front of his door. The letter claimed that they are representing the company that had bought his second mortgage, and it says that he was in default with his loan payments. To make matter worse, the firm is demanding that Chris has to pay in full or they will foreclose and take his space.

If you are in Chris’s shoe, what would you do? What can you recommend?

A good real estate lawyer, who is very familiar and adept with this kind of situation, explained how and why such unfortunate things can happen to anyone. He said that this is called the Zombie Second Mortgages, stepping out of the past. He added that it haunts people and the property that they are in, threatening them of their capability to stay at their home or in this case, commercial space. He also said that this happens after the Great Recession of 2008, and it is really terrifying people who one day suddenly woke up and found themselves about to lose their homes.

The lawyer described two common situations where Zombie Mortgages typically happen:

First: Years After a Bankruptcy

Property owners believe that by including the second mortgage in the bankruptcy, they will no longer be responsible for it. As a matter of fact, a lot of these financially downturned homeowners were under this very notion and it is killing them. They usually keep the first current loan, but stopped paying on the second. In reality, the lender still has a lien against the borrower’s home. Secured debt or mortgage debt in general, do not get discharged because of bankruptcy. You still do not own the house or property. You are not off the hook for the mortgage just yet.

And if you have not made any payment, the one owning the mortgage will have the right to foreclose or demand payment, unless of course you pay it off or negotiate for a acceptable restructuring.

Second: The Business Servicer for your Loan Disappeared and You Can no longer Make Payments.

Just because you cannot find them or contact them to keep payments on the second current it does not automatically mean that you do not owe anything. You have to pay what you owe, period.

Why Such Thing Happen, and All Over the Country?

We can all remember the tsunami of foreclosures and the market value of homes and commercial property plummeting due to the financial crisis. And as the price of their properties continuously nose-dived below to what was originally owed, and a lot of these financially distressed borrowers cannot do anything but simply walked away from this.

A lawyer said, “During those years, holders of second mortgages did not disclose foreclosure due to falling home prices and very little equity in the property.

Today, prices of real estate have recovered to pre-crash levels and in some instances, even higher. Whereas a second mortgage had little practical value years ago, now it is very valuable and worth trying to enforce, giving a successor mortgage holder a “winning lottery ticket,” enabling them to potentially own the property encumbered by the mortgage,.” the lawyer added.

However, in Chris’s situation it may look unfair as he was really trying to make payments and he was not at fault here since the servicer cannot be located to take his payments, and all of the sudden he was facing eviction. What happened? Who are these people anyway?

These people are your Zombie Mortgage Debt Buyers. They feed on “uncollectible/written off accounts which they buy for say, cents on the dollar. They then go about trying to collect or force people to pay. It may be a murky business but it is very profitable.

A lawyer also explained that the same thing happen with mortgage debt that is in default.

The non-operational lender sells his assets to these debt-buying people for say pennies on the dollar. So if you owe for example $100,000, the defunct lender will be offered 4% to 10% of the amount, and the debt buyer will now have the opportunity to collect the whole amount. To a lot of people, this kind of business is akin to extortion, just done legally.

And if you are in this very sticky situation, here are some recommendations that you can think about:

• Firstly, you can always call the customer service department of a title or escrow company. This company will have an extensive resource on a lot of mortgage companies that are now defunct or no longer function, and might be able to find who to pay.
• Secondly, you can also check on federal lending agencies like the Fannie Mae and Freddie Mac. These agencies will usually have information on the whereabouts of these lenders and who their successors may be.
• Third, just because you do not have to pay for now it will not mean that your mortgage is forgiven or forgotten. Instead of spending the money you intend to pay the mortgage for, create a special savings account. Put the money there, and when the time comes that these zombie mortgage debt buyers appear, you will now have the options either to pay them or negotiate the restructuring payment mode. Remember that you owe money to a lending company, and they bought it.
• Lastly, call or hire a real estate lawyer. There will be things that you may not be able to understand at a legal standpoint, thus, getting a lawyer to explain it to you would be your best option. Doing it on your own may do you more harm than good.

It pays to be ready and prepared for situations like this one. Talking to a reliable real estate agent and/or lawyer will further help with your mortgage concerns including zombie mortgage debt buyers.