‘Zombie’ mortgages are coming back to haunt homeowners… how to find out if you

‘Zombie mortgages’ — thought to be long dead home loans — are coming back to life across the US due to rising property prices, experts are warning.

In the years leading-up to the 2008 housing crash, banks issued risky 80/20 loans, which allowed millions of Americans to take out two mortgages at once.

The primary mortgage covered 80 percent of the home’s price, while a second loan — often used for down payments and closing costs — covered the remaining 20 percent.  These so-called piggyback loans were popular among first-time buyers who lacked savings for a down payment. 

When the Great Recession hit, job losses left millions of homeowners unable to pay their mortgages, leading to widespread defaults. 

Banks often chose to focus on recovering the bigger main loan rather than the smaller piggyback loan — since plunging home values meant they were unlikely to recoup their money.

‘Many borrowers either decided not to pay their mortgage or were unable to do so,’ says Kevin Leibowitz of Grayton Mortgage. ‘When real estate values crashed, many homes were underwater — borrowers owed more than their home was worth.’

As a result, lenders stopped sending collection notices, and many homeowners assumed their second mortgage debts had been forgiven, modified, or even discharged in bankruptcy. 

But now, as home values surge, banks and debt collectors are reviving these forgotten loans — demanding repayment with years of accumulated interest.

For example, Massachusetts nurse Karen McDonough was shocked to discover she still owed money on a ‘zombie mortgage’—17 years after buying her first home.

Karen McDonough, from Massachusetts, believed her second mortgage had been written off

McDonough stumbled into a foreclosure auction on her front lawn having fallen victim to a ‘zombie mortgage’

Millions of Americans took out second mortgages on their homes that were given out with extremely low interest rates

McDonough, from Quincy, Massachusetts, believed her piggyback mortgage had been written off after multiple calls with her mortgage company confirming that it had. Then, to her surprise, a foreclosure auction took place on her front lawn.  

McDonough, who raised her two kids there, had owned the house for 17 years and paid her mortgage every month. 

But in 2022, her first mortgage adjusted and the monthly payments were suddenly $700 a month higher because they now included the piggyback loan she believed had been dead.

It turned out the 20 percent mortgage had been sold off by the bank to a debt company within a batch of 600 others, rather than being written off. McDonough managed to sort out the problem with the bank and was able to readjust to her regular mortgage.

Banks had been selling these debts at a very low rate to debt collectors, and as a result stopped sending mortgage statements to their borrowers, who thought they were in the clear.

Collectors were just waiting for the right time to pounce. 

Once the housing market recovered following the 2008 recession and home prices rose again, it became worthwhile for them to go after that money, even if that meant someone would be losing their home. 

These mortgages typically resurface when debt collectors have already started foreclosure proceedings. 

Many homeowners did not receive any information about the loans or added costs for years

In many scenarios people with two mortgages were forced to move after rates shot up

If collectors do foreclose on a home, they get a massive return from the rise in value over the years.

Many home owners do see the worst case scenario play out.

After she discovered her zombie mortgage, McDonough was able to get her loan modified to lower the interest rate and make it affordable again. But she was lucky, many homeowners aren’t sure what they can do. 

While debt companies are allowed to come collect under federal regulations, they are required to send monthly statements to the homeowner detailing the added costs. But in many cases, like McDonough’s, homeowners did not receive any information about the loans or added costs for years before the zombie mortgage resurfaced. 

Unearthing a ‘zombie’ mortgage

Each county in a state records and maintains public property records that homeowners can find online. Simply look for your address and see if there is a second mortgage and a notice of default. 

Homeowners can also file a request for information (RFI) which will flag a zombie second mortgage by asking for specific information about the loan, including the original loan amount, outstanding balance, payment history, and any supporting documentation. This helps to determine if the debt is legitimate.

Know your rights 

Homeowners do have rights when it comes to fighting the extra costs of a zombie mortgage or if…