A financial “monster” from the past is now stalking the financial landscape.
Many homeowners who believed they had escaped the worst of the 2008–09 Great Recession may again be unwitting repeat victims in another horror story.
In the 2000s, due to shoddy lending practices, many borrowers took out “junior” loans such as Home Equity Lines of Credit (HELOCs) or piggy-back loans that replaced cash down payments (sometimes known as “80-20″ loans) when purchasing their homes.
The foreclosure crisis drove many distressed homeowners into bankruptcy or what they thought were favorable workouts with their lenders. Many of the homeowners were assured that their junior loans would be written off as part of their workouts. Those who received bankruptcy relief often had their personal liability on their junior loans discharged. But the junior loans continued to encumber their homes — repayable upon the eventual sale of the home.
Unfortunately many of these junior loans that debtors had been assured were “charged off” were not actually dead and buried. They were merely written down on the books of institutions and put in a file for future action. Because they stopped receiving monthly statements many homeowners were convinced that the mortgages were no longer viable.
Many of these junior loans were sold off on secondary markets to debt collectors for cents on the dollar.
Today, because housing markets have made remarkable recoveries, these secondary-market junior loans have generally become very valuable to their assigned creditors. They have accrued years of interest (without homeowners realizing it); and, many are secured on homes with substantial equity — i.e., “ripe for the picking” at foreclosure.
We have had many clients who receive shocking letters in the mail from these debt collectors. Often the first notice received is a notice of a foreclosure sale of their home just a few weeks in advance.
What can be done about these once-thought-dead loans and those who try to collect them? The classic solution for a zombie invasion — usually involving a pump action shotgun — will not work against these mortgages.
Existing protections for homeowners facing foreclosure of their primary or first mortgage generally do not apply to zombie mortgages. There is insufficient regulation of the debt-collection practices regarding these loans. But creative lawyering and luck may provide a solution of sorts depending on the circumstances.
We recommend reading this Wall Street Journal article that discusses one of Richard Alembik’s clients.
You can also listen to this Wall Street Journal podcast discussing the same client.
Below is attorney Rick Alembik’s video discussion on zombie mortgages with real estate guru John Adams on August 26, 2023: