After his sister was diagnosed with cancer, Shawn Murphy flew home from South Korea, where he was stationed in the U.S. Army Corps of Engineers, to offer support and refinance his Los Angeles duplex to help with medical bills.
As he prepared to refinance the property he had purchased in 2003, he discovered a lien on a second mortgage taken out on the property nearly two decades ago, he told Bloomberg (1). After filing for bankruptcy in 2010, he believed the debt had been erased.
Murphy had stumbled upon what is known as a zombie mortgage, a long-dormant home loan that resurfaces years later, and like many others who make such a discovery, he didn’t realize it until he found himself in a difficult situation trying to refinance or sell.
Worse still is that the debt has grown substantially in the years he has remained dormant: Murphy’s initial debt was $75,000, but he is now being chased for more than double that ($159,355) due to years of back interest (1).
Here’s what you need to know about these revived loans and how to tell if you have one hiding in the background.
Zombie mortgages are typically second home loans that date back to before the 2008 financial crisis and were also known as “piggyback mortgages” (2). These loans seemed to die during the housing crisis, only to resurface years later, often when a homeowner tries to refinance or sell.
In the years leading up to the 2008 housing crisis, a second mortgage was a means to allow borrowers without adequate down payments to qualify for a mortgage without having to pay for mortgage insurance. A prospective homeowner who had only saved 10% of the purchase price could obtain a primary mortgage for 80% of the purchase price and a second mortgage for the remaining 10%.
Some borrowers took out an 80/20 mortgage: a primary mortgage that covers 80% of the home’s value and a second loan that covers the rest. This structure allowed buyers to finance a home with little or no money upfront.
These easy loans gave rise to risky mortgages, and when interest rates began to rise, defaults and foreclosures increased dramatically and the subprime mortgage bubble burst. The collapse in property prices that followed made “combined mortgages” almost worthless, with many selling for a fraction of their face value. Home prices have recovered in the years since, making these loans a valuable asset for the debt collectors who purchased them.
As for borrowers, many had their mortgages modified under the Home Affordable Modification Program (HAMP) or similar programs and thought that also covered the second mortgage. Without receiving any notices or statements in the mail for years, they continued to believe that the loan had been modified, discharged in bankruptcy, or forgiven.
Not all of these loans have resurfaced as zombie mortgages. Some were written off or extinguished during foreclosures or bankruptcies, while others were quietly sold to investors who waited years to cash out until rising home values made them worth buying again.
According to Bloomberg analysis of public property records, 5.5 million of these mortgages were granted between 2002 and 2008 and an estimated 600,000 of these “piggyback mortgages” are still in effect today (1).
Read more: The average net worth of Americans is a staggering $620,654. But it almost doesn’t mean anything. Here’s the number that counts (and how to make it fire)
So why do second mortgages have such staying power when so many primary mortgages don’t?
Second mortgages were a “complication” of the modifications undertaken in the wake of the mortgage crisis, according to The Financial Crisis Inquiry Report: “If a first mortgage is modified or foreclosed, the entire value of the second mortgage can disappear” (3). And the country’s largest banks had substantial amounts of capital tied up in those second liens.
According to an April 2010 Congressional Oversight Panel report, four banks (Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo) held substantial portfolios of these second liens: in the third quarter of 2009, a total of $442.1 billion. “At the end of that same quarter,” the same report says, “the total equity capital of these four banks was $459.1 billion” (4).
The report goes on to say: “There is a tension between the Treasury’s goal of eliminating second liens as an obstacle to mortgage restructurings and the Treasury’s stated interest in maintaining bank capital levels” (4). In other words, providing relief to second mortgage borrowers could have required another round of bank bailouts, so Congress prioritized the banks.
Law professor Arthur E. Wilmarth, Jr., who was a consultant to the Financial Crisis Inquiry Commission, raises the numbers even further, saying that at the peak of the mortgage lending boom in 2007, second mortgages and similar home equity loans represented “about $1 trillion” of outstanding debt, of which the four largest banks held $475 billion at the end of 2008 (5).
As Wilmarth wrote in a 2013 legal paper, “if regulators forced big banks to cancel their second foreclosures, they would likely force the banks to “turn to the federal government for additional bailout money” (5).
Zombie mortgages are mostly second mortgages, so if you’ve never taken out such a loan for your home, you probably have nothing to worry about. If so, and you want to make sure there aren’t any zombies lurking just out of sight to ambush you when you need to tap into your capital, there are a few things you can do to put your mind at ease.
The easiest way to check if there is a lien on your property is to perform a title search on your property by checking local public records. Look up your address in the local county registry of deeds to make sure no additional loans apply to your home.
Review your credit report taking into account previous lenders and “charged off” status (which means the debt has been paid off, but you still need to pay it).
Review your files to find the correct tax form: Forgiven or canceled debts require a Form 1099-C to be sent to both you and the IRS. If you never saw a 1099-C for a previous second mortgage, it may have been sold rather than forgiven.
If the worst happens and you receive a letter from a company you’ve never heard of demanding payment on a loan you thought was history, don’t ignore it. Contact a real estate attorney before responding to the debt collector.
We rely only on verified sources and credible third-party reports. For more details, see our Ethics and editorial guidelines..
Bloomberg (1); Consumer Financial Protection Bureau (2); GovInfo.gov (3); Congress.gov (4); Social Sciences Research Network (5)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
