The Walking Debt: How to Kill Zombie Foreclosures and Mortgages

Nothing’s more financially terrifying than zombie foreclosures. You face one when you leave your property after receiving a notice of default, assuming the mortgage holder wants you to sell the property to cover what you owe using the proceeds from the sale. However, foreclosure gets canceled for one reason or another. You don’t know this because the mortgage holder doesn’t have to keep you in the loop. The other party decides to go radio silent, leaving you in the dark about your homeownership status.

Ultimately, you remain responsible for all its costs, even if you abandon the house. Over time, your bills pile up and stay unpaid, damaging your credit and putting you in a worse financial situation.

How Do You Know If You Have a Zombie Mortgage?

A zombie mortgage is an unpaid home loan you think doesn’t exist anymore. You may believe this when your mortgage holder stops contacting you without initiating foreclosure, even if you still owe money.

Your creditor doesn’t forget about your debt, though, no matter how much time passes. The other party may do nothing, probably because they don’t want to deal with your property yet. Your zombie mortgage holder needs a compelling reason to resurface and attempt to collect what you owe — growing equity is one of them.

Creditors want valuable collateral they can resell and convert into cash more quickly. Most are allergic to distressed real estate because of the headaches it brings. Zombie mortgages can remain dormant until the securities backing them increase in value.

Generally, unsettled second mortgages turn into zombies. First mortgages get paid off before second mortgages. Since second mortgages take less priority, there’s no guarantee their holders will get paid when foreclosing on less valuable collateral.

As a homeowner, you must be wary of a zombie mortgage because it can evolve into a zombie foreclosure. Check your county’s public property records. You can find out whether you have such a debt by doing a title search online. Look up your address to determine if you have a forgotten second mortgage against your house or any past notice of default.

You want to see a deed of reconveyance, for it means your creditor has released a lien on your property. Conversely, default and no resolution, lien discharge not filed, and secondary mortgage unsatisfied indicate you may have zombie mortgage exposure.

Another avenue worth exploring is reviewing your old paperwork. Look for documents stating that your mortgage holder forgave your debt, like an IRS Form 1099-C.

How to Protect Yourself From Zombie Mortgages and Foreclosures

While zombie foreclosures and mortgages may be scary, many options are available to combat them. These tips should help you blow off the head of your zombie mortgage or foreclosure when it rises from the grave.

Talk to Your Mortgage Servicer

You and your mortgage servicer want the same thing — avoid foreclosure. The other party would move heaven and earth to convince you to resume mortgage repayment instead of going through the grueling foreclosure process and contending with the difficulties of selling a distressed house.

Once you learn about your zombie foreclosure, contact your service to discuss loss mitigation options to cure your default. The usual options are forbearance, reinstatement, partial claim or deferral, repayment plan and loan modification.

• Forbearance: It temporarily lifts your obligation to repay your mortgage, giving you time to regain your financial footing.
• Reinstatement: It means repaying the total past-due balance once forbearance ends, a straightforward way to bring your mortgage payments current. If you have a non-repayment home loan, your repayment options post-forbearance depend on the entity backing your loan.
• Partial claim or deferral: It lets you move some or all of your past-due principal and interest balances to your mortgage’s backend. This option allows you to move forward without immediately repaying what you missed.
• Repayment plan: It’s where your servicer rolls your back payments into your loan, increasing your regular monthly payments for a specified period.
• Loan modification: It also rolls your missed payments into regular payments, except it may also involve getting a new interest rate or loan term.

Short sale and deed-in-lieu-of-foreclosure are viable options, too. While either lets you avert foreclosure, you must vacate the property afterward. On the bright side, short sales and deeds-in-lieu-of-foreclosure impact your credit less and help you qualify for a new mortgage more quickly.

Your servicer may resort to forgiveness. Under this option, the other party forgives some or all of your debt, but you must vacate the premises. 

Consult a Real Estate Attorney

If a second mortgage holder threatens you with foreclosure and you want to dispute the debt, seek legal advice to mount a defense. Many use the statute of limitations or challenge the foreclosing party’s authority with a request for information under the Real Estate Settlement Procedures Act (RESPA) to nullify collection attempts.

Moreover, looking for a violation of your loan contract, RESPA, the Truth in Lending Act, the Fair Debt Collection Practices Act or any state unfair and deceptive acts and practices statutes may be an effective defense.

Zero Out Your Debt

Leverage your property’s equity to pay your zombie mortgage in one lump sum. A cash-out refinance is your safest bet. This option lets you use your house as an ATM and obtain funds however you want, like paying off an unsatisfied second mortgage.

A refi is an entirely new loan, resetting the clock on your first mortgage. Under favorable market conditions, you can negotiate for a lower interest rate and a shorter or longer term.

A word of caution — you should only take this route when you don’t intend to dispute your debt. Discussing the zombie mortgage with your servicer or the collection agency is akin to agreeing you owe the amount. Doing anything more than requesting proof of the debt’s existence may restart the clock on the statute of limitations, which may weaken your defense and reduce your legal remedies.

Stop Unpaid Mortgages From Turning Into Zombie Foreclosures

Zombie mortgages and foreclosures are dead only in imagination. They’re real, so you must deal with them head-on. Running away just delays the inevitable. Stay put as you figure out what to do, and leave only when you receive an eviction notice.