As the name suggests, zombie mortgages can be terrifying. They appear out of nowhere, come back from the dead, and take over houses. And they are appearing now more than ever. What they are, why they are such a problem now, and twelve ways for homeowners to prevent zombie mortgage foreclosures are all covered in this article. See a new Chapter 11a in NCLC’s Home Foreclosures for even more information.
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As the name suggests, zombie mortgages can be terrifying. They appear out of nowhere, come back from the dead, and take over houses. And they are appearing now more than ever. What they are, why they are such a problem now, and twelve ways for homeowners to prevent zombie mortgage foreclosures are all covered in this article. See a new Chapter 11a in NCLC’s Home Foreclosures for even more information.
What Are Zombie Second Mortgages?
Second mortgages are the zombie mortgages that are currently causing havoc. Predatory lenders created many in the years prior to the 2007 financial crisis. Brokers frequently combined first and second mortgages in a single loan transaction during that period of frenetic lending. These transactions, also known as “80-20 mortgages,” typically used a first mortgage to finance 80% of the principal balance and a second mortgage to finance the remaining 20%. In order to facilitate easy securitization, the first mortgage was kept within a loan-to-value ratio. Many of these mortgages experienced early defaults due to negligent underwriting and abusive terms.
Why Did These Second Mortgages Become Dormant?
Throughout the Great Recession, many homeowners struggled to make payments on their first mortgages, often with the assistance of loan modifications. Home values sharply decreased in the early years of the Recession. First mortgage holders faced lower recoveries if they foreclosed because there were so many properties that were deeply underwater. Conversely, if second mortgagees chose to foreclose, they were almost certain to receive nothing. Unsurprisingly, the owners of these loans wrote off the second mortgages because so many homeowners were unable to make their payments.
These “write-offs” were accounting techniques used to show that the loans were no longer assets that generated income. The borrowers were still legally obligated to pay the debts even though there had been an accounting adjustment. In most cases, the loan owners retained the choice to change their minds and demand payment again, unless some of the legal principles discussed in this article applied. Borrowers did not understand this. Many people believed that second mortgages were also covered when their first mortgages were modified. Borrowers waited years, sometimes even more than a decade, before hearing anything about the second mortgages.
Why Are Zombie Second Mortgages Coming Back to Life Now?
Second mortgage zombies are reviving due to basic economic factors. Now there is home equity for them to feed on. In many regions of the country, home values significantly increased over the past few years. Homes that were underwater in 2010 are now significantly above water, and homeowner equity has turned into a tempting target. Many homeowners have worked to reduce their first mortgages in the years following the Great Recession, which has increased their home equity.
Who Is Foreclosing on These Second Mortgages?
There are a variety of parties involved in zombie second mortgage foreclosures, and the original lenders are rarely still present. Today, debt buyers or their collection agents are frequently the parties threatening foreclosure. Debt buyers purchase collections of delinquent loan accounts and arbitrarily choose which to foreclose on. They can concentrate on properties with high equity and those where they can quickly pay off the first mortgage to obtain their own free and clear title.
How Does a Second Mortgage Foreclosure Work?
The buyer typically obtains title free of any liens that were attached to the property after the mortgage’s origination date at the foreclosure sale of a first mortgage. In the event of a second mortgage foreclosure, the person who purchases the property at the foreclosure sale does not get an unencumbered title. Only the borrower’s right to redeem the property from the first mortgage is acquired by the buyer.
The first mortgage can be paid off and title to the property obtained if a buyer at a second mortgage foreclosure sale chooses to do so. A second mortgage’s foreclosure is significant because it eliminates the borrower’s ability to redeem the property by paying off all outstanding mortgage debts. Most state laws allow the buyer of a second mortgage at a foreclosure sale to take possession of the property and evict the borrowers. It goes without saying that a second mortgage debt buyer and its debt collector have incredibly powerful leverage because they can use the effective remedy of foreclosure. NCLC’s Home Foreclosures §§ 11a. 1. 2 through 11a. 1. 4 examine the substantive differences between first and second foreclosures on mortgages.
12 Ways Homeowners Can Fight Off Zombie Second Mortgage Foreclosures
It is blatantly abusive to revive a long-dormant second mortgage and suddenly threaten to foreclose. Courts should be prepared to step in to protect homeowners when presented with strong defenses and claims. The legal defenses and claims that give courts the power to stop zombie foreclosures are described in New Chapter 11a of NCLC’s Home Foreclosures. This article summarizes the important claims and defenses.
1. The Statute of Limitations
Using statutes of limitations as a strong defense against second mortgage foreclosure According to some state laws, the passing of the foreclosure statute of limitations can be used to both prevent foreclosure and eliminate the mortgage as a lien against the property.
To find out the statute of limitations that apply to foreclosures, check your state’s laws. The status of the law is still unknown in a few states. The applicable limitation periods for foreclosures in most states are summarized in Appendix E of NCLC’s Home Foreclosures. The statute of limitations for foreclosures is frequently equal to the six-year limitation period for enforcing negotiable notes and other written contracts.
Other states use statutes of limitations to establish real property rights These time periods, which are based on real property law, can be anywhere between ten and thirty years long. There are some states that do not have a statute of limitations for foreclosing on mortgages or trust deeds. NCLC’s Home Foreclosures 5 provides more information on the specific state statutes of limitations for foreclosures. 3. 1.
The first step is to determine the statute of limitations. The second step is to determine when the statute of limitations starts to run under the laws of the state. There are three possible trigger events for mortgages and deeds of trust that should be taken into account:
NCLC’s Home Foreclosures § 11a. Defending second mortgage foreclosures is a particular focus of Section 2, which addresses statutes of limitations.
2. Challenging Authority to Foreclose a Second Mortgage
The party foreclosing a Second Mortgage shall have the power to enforce the Second Mortgage and the Note and Mortgage thereon. Chapters 2, 3, and Chapter 4 of NCLC’s Home Foreclosures provide in-depth analysis of the right to foreclose. The fundamental ideas presented there also apply to second mortgage foreclosures.
The systems used by larger mortgage services to record transfers of negotiable notes and account histories are unlikely to be in use by debt buyers who purchase pools of defaulted second mortgages. A successful challenge to a party’s right to foreclose a second mortgage can be built using a request for information (RFI) under RESPA regarding loan ownership and possession of the pertinent contract documents. See NCLC’s Home Foreclosures § 11a. 3.
3. Claims under TILA and RESPA
Zombie second mortgage owners and servicers are subject to TILA and RESPA claims. Most significant TILA and RESPA provisions do not exempt junior mortgages, though some do not apply to HELOC loans. NCLC’s Home Foreclosures § 11a. 4. 1 discusses coverage of second mortgages under TILA and RESPA.
TILA and RESPA both permit claims for statutory fines, compensatory damages, and legal costs. These laws also establish a crucial industry norm, requiring mortgage loan owners and servicers to regularly update borrowers on the status of their loans. Claims under TILA and RESPA can include:
The statutes of limitations for TILA and RESPA claims may apply, though in some states these claims may be brought up through recoupment in a foreclosure proceeding. Questions regarding the appropriate defendant in the action are also raised by TILA and RESPA claims. However, as mentioned in items #5 and #6 infra, TILA or RESPA violations may give rise to contractual claims under the terms of the mortgage loan agreement as well as UDAP claims. They may also support claims of negligence and fraud under state law.
4. The Fair Debt Collection Practices Act
5. Contract-Based Claims and Defenses
Standard loan agreements include clauses requiring lenders to foreclose in accordance with applicable federal and state laws. See NCLC’s Mortgage Servicing and Loan Modification § 5. 5 (talking about the term “applicable law” as it relates to the standard GSE security instrument) TILA and RESPA require lenders and their servicers to communicate with borrowers and give them certain information as “applicable laws.” When, how much, and where to send payments are all included in this information. When the borrower solely relies on the TILA and RESPA regulations, potential statute of limitations challenges and disagreements over who is the proper party defendant may occur. By framing these obligations as contractual conditions to a foreclosure, these issues are avoided. See NCLC’s Home Foreclosures § 11a. 6.
6. Defenses and Claims Based on State UDAP Statutes
Owners of second mortgages and their servicers are required by federal and state laws to disclose changes in loan ownership and servicing rights as well as information regarding an account’s current status. State unfair and deceptive acts and practices (UDAP) laws may be invoked to enforce claims for violations of TILA, RESPA, and other federal and state laws requiring regular disclosure of loan information to borrowers. See NCLC’s Unfair and Deceptive Acts and Practices § 6. 4. 1. The practice of lying in wait and consistently failing to communicate prior to a foreclosure, according to the borrower’s persuasive arguments, satisfies both the “unfair” and “deceptive” requirements set forth in the state UDAP statutes. See NCLC’s Unfair and Deceptive Acts and Practices §§ 4. 2. 15, 4. 3. 3, 4. 4. Foreclosures and financial institutions are exempt from all state UDAP laws. However, many are able to do so and can order a variety of relief, including equitable remedies. See NCLC’s Home Foreclosures § 11a. 7.
7. Laches and Equitable Defenses to Second Mortgage Foreclosures
When the owner of a zombie mortgage attempts to foreclose after the account has been inactive for a long time, equitable defenses to foreclosure may be available. According to the doctrines of unclean hands or laches, the foreclosure may be barred. According to a typical state law, the elements of laches are: (1) knowledge of the claim’s basis by the creditor; (2) unreasonable delay in bringing the claim; and (3) harm resulting from the unreasonable delay. There may have been missed opportunities to address the loan default in a timely manner, such as through loss mitigation, by borrowers who believed their loans had been written off or modified and were unable to communicate with anyone about the loans for years. See NCLC’s Home Foreclosures § 11a. 8.
8. State Law General Foreclosure Requirements
Each state sets requirements for conduct of a valid foreclosure. A mortgage or deed of trust and note must typically be enforceable by the party doing the foreclosure. The default must be declared, specific notices must be given, and the amount owed must be specified. NCLC’s Home Foreclosures § 5. Procedural difficulties in the context of first lien mortgage foreclosures are covered in Chapters 5 and 8. Look into state laws to see if second mortgages are subject to the same procedural requirements as first mortgages, such as attending settlement conferences and mediations. The foreclosing party should be held to the same standards of compliance with the applicable state foreclosure laws as a first mortgagee to the extent that the requirements apply to second mortgages. NCLC’s Home Foreclosures 11a discusses general state foreclosure laws and how they relate to second mortgages. 9.
9. State Laws That Specifically Regulate Second Mortgages
13 states have passed laws that are specifically intended to control second mortgages. The general discussion of these statutes can be found at NCLC’s Home Foreclosures 11a. 10. 1 and a state-by-state analysis is found at § 11a. 10. 2. Several of these statutes limit default-related charges. Others impose restrictions on the origination of second mortgage loans and call for special licensing. If these origination laws are broken, debt buyers may be subject to recoupment claims.
10. Bankruptcy Remedies for Zombie Second Mortgages
In addition to the automatic stay’s suspension of foreclosure actions, chapter 13 bankruptcy grants homeowners who apply for relief the chance to contest a second mortgagee’s claim. When a statute of limitations prevents all or a portion of the claim, the homeowner may contest the amounts owed. Despite the expiration of the statute of limitations for a homeowner’s affirmative claims, recoupment is also possible. In a chapter 13 case, the homeowner can “strip off” the junior mortgage when the first lien mortgage and other senior encumbrances are greater than the value of the property. This turns the loan balance into an unsecured debt that is dischargeable. Chapter 9 of the NCLC’s Home Foreclosures Guide covers additional bankruptcy strategies for dealing with mortgagees. You can read more about how bankruptcy specifically affects second mortgages at NCLC’s Home Foreclosures 11a. 11.
11. Loss Mitigation Options for Junior Mortgages
The major federal mortgage loan guarantors and insurers have developed loss mitigation options that can be extremely useful tools for preserving homeownership. But some choices, such as many modification programs, are only available for first mortgages. But many forbearance options, like those provided by the CARES Act, are available to all federally backed mortgages regardless of their lien position. NCLC’s Home Foreclosures § 11a. 5 outlines the major servicing options that cover junior mortgages.
12. Deficiency Claim Issues Specific to Second Mortgages
Second mortgages may create specific issues with post-foreclosure deficiency claims. For instance, after the senior mortgage has been foreclosed, borrowers might discover that they are responsible for a deficiency claim on a junior mortgage. Nevertheless, state anti-deficiency statutes may protect borrowers from these claims. NCLC’s Home Foreclosures § 10. 4 provides an overview of the problems with post-foreclosure deficiency claims. NCLC’s Home Foreclosures § 11a. 2 gives examples of the reach of state anti-deficiency protections for second mortgages that are state-specific.
NCLC Fair Debt Collections and Mortgage Training Conferences Will Examine Zombie Foreclosures
Attention consumer attorneys: There will be sessions on zombie second mortgage foreclosures at two upcoming NCLC conferences.
NCLCs Fair Debt Collections Conference will take place April 24-25, 2022, in Orlando Florida. Among other Fair Debt Collection Practices Act issues, a session will focus on using the FDCPA to combat zombie second mortgages, Information on the conference agenda, registration, and attendance options is available here.
NCLCs Mortgage Training Conference will take place June 23-24, 2022, in St. Louis Missouri. The conference will focus on pandemic-related mortgage foreclosure issues and include a special session focused exclusively on zombie second mortgage foreclosures. Information on the conference agenda, registration, and attendance options is available here.
Geoffry Walsh is a staff attorney at the National Consumer Law Center (NCLC), where he concentrates on issues related to consumer credit, bankruptcy, and preventing foreclosure. On the subject of foreclosure mediation, he has submitted written testimony and taken part in policy advocacy at the federal and state levels. He is an active member of the National Association of Consumer Bankruptcy Attorneys and served as a panelist and instructor at trainings and legal education seminars on topics related to foreclosure prevention and bankruptcy. Walsh is a contributing author to Consumer Bankruptcy Law and Practice, Student Loan Law, Fair Debt Collection, Truth in Lending, and Credit Discrimination as well as the books Home Foreclosures, Mortgage Servicing, and Loan Modifications.
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FAQ
What happens when 2nd mortgage is charged off?
Answer. Your second-mortgage debt hasn’t been canceled or forgiven. With a “charge off,” the creditor no longer views the money you owe as a source of profit but rather counts it as a loss in accounting. Unlike forgiven debt, a charged-off loan is still regarded as a liability that you must pay.
Does a second mortgage ever go away?
The second lender won’t go away even if they decide against foreclosing because they can’t sell the property for anything. They will return eventually and foreclose once home values increase or you pay off your primary mortgage enough to gain some equity in the property.
What happens when a mortgage loan is charged off?
You are still responsible for paying back the loan unless the bank has forgiven or cancelled the debt. The bank may try to collect the debt itself after a loan has been charged off, or in some cases, it may sell the account to a collection agency.
Can my second mortgage be forgiven?
Your second lender, including a home equity line of credit or home equity loan, may voluntarily forgive your second mortgage. For tax purposes, the lender deducts all or a portion of the loan amount as a bad debt.