Zombie Mortgages: How To Survive Them

Zombies are corpses that have been somehow re-animated after death to stalk the living and eat their brains, as anyone can tell you from watching Night Of The Living Dead, The Walking Dead, 28 Days Later or even Micheal Jackson’s famous “Thriller” music video. But what’s scarier is when mortgages come back from the dead to surprise unsuspecting borrowers, just like Jason Voorhees in Friday The 13^th. Just in time for Halloween, we explain the real-life threat of zombie mortgages and how you can avoid becoming their next victim.

What Is A Zombie Mortgage?

A zombie mortgage is a home loan you thought was paid off or forgiven but is still active. This can happen when lenders write off a debt, such as a second mortgage, and sell it to debt collectors. The borrower stops receiving statements or other communication and assumes the matter is settled. Years later, a debt collector that owns the lien contacts you and demands payment. Because the debt was presumed dead and has been resurrected, it’s sometimes called a zombie second mortgage.

“If you have never paid off the particular mortgage, it is likely a zombie mortgage,” says D.J. Olojo, managing director of ASO Custom Homes in Atlanta and host of The Foreclosure Fix podcast. “You might not have paid on the mortgage for numerous years, and it could have even been charged off. The mortgage is still an active lien on the property until a mortgage satisfaction is recorded in the public records of the county where the property is located. You can order a title search for around $100 and see all the liens associated with a property.”

Where Do Zombie Mortgages Come From?

Discovering you have a zombie mortgage can be confusing and haunting. You may wonder where this came from, especially if you pay your mortgage on time. Zombie mortgages are usually second mortgages that get lost in the shuffle. Before the 2008 housing crisis, lenders often issued borrowers two mortgages for the same property instead of a down payment. For example, the primary mortgage might be for 80% of the purchase price, and the second mortgage would be for 20%. In other cases, the homeowner may have taken out a second mortgage in the form of a home equity loan or line of credit.

Here are some ways a zombie mortgage can manifest:

If you default on your second mortgage, the lender can start foreclosure even if you’re current on your primary loan. Some lenders will write off such loans as uncollectible or sell them to debt collectors without notifying the borrower. In either case, the buyer assumes the debt has been settled because they no longer receive bills. The buyer also may incorrectly think the second mortgage debt was combined with their primary mortgage, forgiven, or discharged through bankruptcy.

Years can go by before the debt owner contacts the borrower with a demand for payment. It’s like the second mortgage came back from the dead! Even worse, the lender can threaten foreclosure if you don’t pay the outstanding debt with interest and fees. A true nightmare.

Can I Lose My Home To A Zombie Mortgage?

Yes, if a zombie mortgage is a legitimate debt, its owner can foreclose on your home if you do not pay it back. Lenders and debt collectors can seek repayment within six years of your official date of default. If the lender chooses not to foreclose, you’ll still be on the line for the debt. Worse, these debt collectors often tack on steep retroactive interest and fees.

“You can most definitely lose your home to a zombie mortgage,” Olojo says. “The mortgage attached to your property is an active lien. The lender can foreclose on you. Until a satisfaction is recorded by the lender, there is always a risk of losing your home.”

How Common Are Zombie Mortgages?

Collection on zombie second mortgages has been growing. A 2024 NPR report found at least 10,000 zombie mortgages led to foreclosure activity over the previous two years in New York state. The report also found that at least 500 zombie mortgages were pending foreclosure in Maryland.

Most zombie mortgages originated in the years leading up to the 2008 housing crisis. Many loans were issued without sufficient underwriting, so when property values plummeted, many homeowners were left owing much more than their homes were worth.

With so many mortgages underwater, foreclosure on second mortgages was too costly for many lenders to be worthwhile. Instead, they sold these past-due second mortgages to debt collectors. When housing values increased dramatically as the COVID pandemic hit, debt collectors started coming for their money – and added interest and penalties.

“Zombie mortgages are widespread,” Olojo says. “When banks charge off loans or when banks go out of business, many loans become zombie mortgages. These mortgages get bundled up and sold to other banks, hedge funds and investors. Some of these institutions work the loans and try to get the borrowers to pay off. Other institutions shelve the files and wait for the borrower to sell or refinance them. Because these liens are in the public record, they will have to be addressed at some point.”

Signs You Might Have A Zombie Mortgage?

Here are some red flags that suggest you watch out for a zombie mortgage:

How To Escape A Zombie Mortgage

If you think you have a zombie mortgage, it’s important to understand your rights. Debt collectors are legally required to prove the debt is legitimate within five days of contacting you. Here are some steps to take:

“You must treat a zombie mortgage with the same respect as any other active lien,” Olojo says. “After all, they can foreclose on your property.”

Bottom Line

A debt collector contacting you about a zombie second mortgage can be quite a scare. First, you should figure out whether the debt is real by reviewing your paperwork and checking public records. If you’re uncertain, you can ask a lawyer to guide you through your options. If the debt is real, it will need to be dealt with one way or another to avoid losing your home through foreclosure.