The rise of the zombie mortgage
Many people used second mortgages to consolidate debt or to make home improvements. In the past these loans were paid off with a regular payment schedule. As noted by the Consumer Financial Protection Bureau (CFPB), leading up to the 2008 housing crisis some lenders relied on predatory practices to lock homeowners into mortgages that had high interest rates and that would be difficult to repay. Prior to the COVID crisis, several lenders charged off the unpaid balances as a business loss or sent the collection notice to debt collectors who let the loans lie dormant. Borrowers no longer received notices, and, under the statute of limitations, these loans were believed to be uncollectable. In fact, many borrowers forgot that they even had second mortgages.
However, now that the Covid crisis is over and property values are rising, there may be increased equity in the home along with higher interest rates. Mortgages presumed to be “dead” after decades of inactivity have been resurrected and unknowing borrowers are now receiving delinquent notices. These “zombie” mortgages, as named by the CFPB, can be quite burdensome for the homeowner with inflated interest and fees. Second mortgage homeowners may now find it impossible to repay the loan and many are facing foreclosure.
Homeowners in this predicament should know that aggressive debt collectors attempting to collect on zombie second mortgages may be in violation of the Fair Debt Collection Practices Act. Debt collectors cannot sue or threaten to sue to collect time-barred debt. And even if the debt collector does not know that the debt is time-barred, this rule still applies.
If you are a borrower who may be in this situation or could potentially be in this situation, there are actions that can be taken to protect you. It is important to know exactly how much is still owed on the second mortgage and determine who owns the loan. Although there may have been a primary lender in the beginning, the loan may have been sold to a second (or in some cases a third) party. The owner of the loan can be discovered by examining your credit report. The Fair Debt Collection Practices Act (ftc.gov), states that collectors must validate the debt within 30 days of contact. According to the FDCP, validation includes documentation from the original creditor, the amount owed, and the lender’s permission to collect the debt. The collector of the zombie mortgage must have the authority to enforce the underlying contract. You will need to take time to determine If the statute of limitations applies to your loan and determine if legal help is necessary to secure validation that collection on the loan can or cannot go forward. The best defense you have is knowledge. If you may be a victim of a zombie mortgage, determine your rights, your responsibilities, and the time limit you have to secure your property.
Mary Fox Luquette, MBA, CLU, ChFC is a Finance Instructor in the BI Moody III College of Business at the University of Louisiana at Lafayette.
This article originally appeared on Lafayette Daily Advertiser: The rise of the zombie mortgage
