Everything You Need to Know About Zombie Mortgages

You may have heard the term “zombie mortgage” floating around the news lately. If you have, and are wondering what it is (and whether you should be worried about it), you’re not alone – but we have answers. As interest rates fluctuate, and the American economy enters a soft slowdown, concerns about potentially at-risk mortgages have an urgent need for answers.

NewHomeSource is here to explain what a zombie mortgage is, how they happen, and how you can protect yourself from having your mortgage rise from the grave as a zombie mortgage.

What Is a Zombie Mortgage?

So what is a zombie mortgage?

A “zombie mortgage” is a term used to describe a situation where a homeowner believes their mortgage was resolved in some way, only to later find out the debt remains active – in other words, a debt you thought was dead has come back to life. 

The term “zombie mortgage” highlights the unexpected and often shocking nature of these resurfacing debts, causing financial and legal challenges for the affected homeowners.

Discovering that a mortgage you thought was cleared rising from the grave is haunting, but you have options that ensure that, unlike Michael Myers, your mortgage will stay dead.

How Do Zombie Mortgages Happen?

There are a few ways people end up with a zombie mortgage:

Your Lender Sells Your Debt Without You Knowing

The original mortgage lender packages up the mortgage with other held debt, and sells the responsibility to collect to a third-party company. The homeowner is not well-informed of the sale of debt, and assumes the lack of communication with their former lender means the debt has been cleared

Uninformed Home Equity Line of Credit (HELOC)

A typically older homeowner takes out a home equity line of credit. When an adult child or executor comes in to help manage their asserts, they are not informed of the second mortgage, and believe that there is more equity accrued in the home, and less money owed on the mortgage.

Confusion from Jumbo Loan Splits

This zombie mortgage scenario typically occurs with homeowners who take out jumbo loans. When the homeowner takes out a mortgage, the lender takes the total amount of the loan and splits it into two or more mortgages. When one of the smaller mortgages is payed off, the homeowner assumes that the total amount of the loan has been cleared.

Foreclosure Process Errors

The foreclosure process may not have been completed properly, or the lender may have abandoned the process, leaving the homeowner responsible for the mortgage debt.

Improper Title Handling Post-Foreclosure

Even after foreclosure, the title of the property may not have been transferred properly, meaning the homeowner is still legally responsible for the property and any associated debts.

Bankruptcy Discharge Errors

In some cases, debts thought to be discharged in bankruptcy can reappear if not handled correctly, leaving the homeowner liable for the mortgage.

Lender Administrative Mistakes

Mistakes or administrative errors by the lender or loan servicer can lead to the mortgage not being fully closed out post complete payment of the mortgage.

In all zombie mortgage scenarios, poor communication between the lender and the homeowner results in the homeowner having an incorrect picture of their financial situation and health.

What Do I Do if I Have a Zombie Mortgage?

If you have a zombie mortgage, don’t panic. A zombie mortgage does not automatically mean you are headed for bankruptcy or foreclosure.

In many zombie mortgage scenarios, it’s lender errors and poor communication, not improper handling by the mortgage holder, that are the root causes of the issue. In many cases, it should not result in financial penalties by the homeowner. Even in zombie mortgage scenarios where both parties are at fault, clear communication and a timely response could save your credit and your home.

Hire an Expert Attorney

The first thing you need to do is hire a contract law attorney with a history of defending clients from issues with unclear titles and complicated mortgages.

Your attorney will help you go through all your financial and legal documents, including,

• Your mortgage
• Closing documents
• Your home title
• Any additional internal documents about your mortgage and title generated by the lender
• Any documents relating to a foreclosure
• Any documents relating to a bankruptcy

This initial document review can help determine if lender error caused the revivification of your mortgage. Having a lawyer on your side as you navigate your zombie mortgage can play a major role in vanquishing your debt, protect you from future liability, and help you and your lender come to a correct solution.

While an attorney isn’t a silver bullet, and you may still be responsible for the revived debt, having dedicated legal aid can ensure everyone involved with your zombie mortgage understands what happened and the best path forward.

Get a Professional Moderation Service Involved

If your lender has not already suggested using a professional moderation service while determining how to move forward with a zombie mortgage, you should insist on their services.

A professional, third-party moderation service provides both the mortgage holder and the lender with a neutral forum that can provide binding resolutions that is not a court of law. If either party is hoping for limited settlements or wants to keep costs down, arbitration services can help keep the situation from escalating into a major court battle.

Your moderation or arbitration provider will give you a space to showcase all your documents, and can explore settlement agreements that eliminate miscommunication, cut through any lender errors, and respect the actual legal situation of the mortgage.

In the event of errors caused by the mortgage holder, settlements reached in arbitration can potentially result in payment plans that can stave off foreclosure or bankruptcy.

Hire a Certified Public Accountant

The next person you want on your zombie mortgage extermination team is a Certified Public Accountant (CPU). A CPU can help examine your finances to determine if lender error caused the zombie mortgage.

Your CPU can go through all your financial interactions with your lender to provide a clear picture of the financial realities relating to your mortgage. If you are the executor to a third-party’s estate that is in zombie mortgage jeopardy, a CPU can provide an unemotional set of eyes on your loved one’s financial health.

Bringing a CPU to a zombie mortgage battle gives everyone involved a clear picture of the financial reality of the mortgage. Coming to your lender or moderation services with facts about your mortgage’s health and not vague statements about how you know you paid on time all the time demonstrates that you are responsible and rational while dealing with a stressful situation.

Determining the correct path forward in the event you have a zombie mortgage is stressful. Stay as calm as you can, and engage with professional help as much as possible to ensure you are not responsible for bad debt that should have staid in the grave.

How Can I Find Out if I Have a Zombie Mortgage?

You should find out if you are at risk for a zombie mortgage even if you are current on your mortgage payments, or think that your bankruptcy, foreclosure, or home sale went through without a hitch.

If you are a current homeowner or representing a current homeowner, tell your lender you are concerned about a zombie mortgage, and want to have a meeting where an attorney can do a document review with them. During this document review check for:

• Any errors or ambiguity in the actual mortgage document
• Any errors or ambiguity in the actual home title
• Evidence that multiple mortgages were taken out for one loan
• Evidence of a home equity line of credit being take out on the home
• Language in the loan that allows the lender to sell the debt to third parties

Correct any errors or ambiguities immediately. This will be good for you and for your lender, as both parties will be on the same page, and not run the risk of having to go through more expensive arbitration or court cases at a later date.

Document any evidence of home equity lines of credit being taken out or multiple mortgages being taken out for one loan, and make sure you have payment plans for these additional documents. Planning ahead allows you and your lender to have a clear picture of your financial situation, and prevents any confusion about the value of equity held in a home.

If the terms of your mortgage, allow your debt to be sold onto third parties, document it, and create a clear chain of communication in the event the mortgage gets sold. This ensures everyone knows how to react in the event of your mortgage gets sold, and ensures the current lender isn’t selling bad debts to third parties.

If you have gone through a bankruptcy or foreclosure, tell your former lender you are concerned about a zombie mortgage, and want to have a meeting where an attorney can do a document review with them. During this document review check for:

• Any communication errors made between the courts or arbitration services and the lender
• Any implementation errors made by the lender after they received the documentation about your bankruptcy or foreclosure
• Any errors about who holds the title of your former home

Correct any errors or ambiguities immediately. This will save both parties unnecessary legal costs and an untold amount of stress further down the line. If there aren’t any errors in your documents, document this fact to ensure that all parties knew you no longer held the mortgage debt of your former home.

If you or someone you represent have sold a home and assumed the title and mortgage were clear, contact the former lender and tell them you are concerned about a zombie mortgage, and want to have a meeting where an attorney can do a document review with them. During this document review check for:

• Any ambiguity or errors with the transfer of the title of your former home
• If the proceeds of the home sale actually cleared the mortgage
• If there were any errors or ambiguity with documentation relating to the ending of the mortgage

Correct any errors or ambiguities immediately. Any errors with the title of your former home could result in a zombie mortgage for you, and the current homeowners not having clear ownership of their home.

How Can I Protect Myself from Zombie Mortgages When I Get My Mortgage?

Home shoppers can protect themselves from zombie mortgages when they make their dream home a reality. As you prepare the mortgage for your new home, clear communication with your lender and some legal leg-work on the front end can save you stress and money further down the road.

1. Work with Reputable Lenders

The first step to ensuring your mortgage can’t come back to haunt you is to work with reputable lenders with a history of many satisfied homeowners. Seemingly minor clerical errors have resulted in a spate of zombie mortgages, and working with experienced and responsible lenders can serve as a shield from basic errors.

2. Attention to Detail

Paying attention during the closing process for your home can also help prevent a future zombie mortgage.

If you can, include clear language about:

• Whether your lender can resell your mortgage, and if they can, create clear lines of communication about the sale
• Splitting your mortgage into multiple loans, and create clear lines of communications about splitting the mortgage
• IInforming all parties on the home title if one person on the title attempts to take out a home equity line of credit

A zombie mortgage is nothing to laugh about. It represents a major breakdown within a financial transaction, brings unnecessary stress to a family, and results in pointless costs from remediation attempts. Fortunately, homeowners can take steps to protect themselves from future zombie mortgages when they buy a home, sell an old house, and if they have to go through bankruptcy or foreclosure.