LA veteran blindsided by ‘zombie mortgage’ after 14 years. Why so many Americans face the same nasty surprise decades on

As for borrowers, many had their mortgages modified under the Home Affordable Modification Program (HAMP) or similar programs and thought that covered the second mortgage too. With no notices or statements arriving in the mail for years, they continued to think that the loan was modified, discharged in bankruptcy, or forgiven.

Not all of these loans have resurfaced as zombie mortgages. Some were written off or extinguished during foreclosures or bankruptcies, while others were quietly sold to investors who waited years to collect until rising home values made them worth pursuing again.

According to Bloomberg’s analysis of public property records, 5.5 million of these mortgages were made from 2002 through 2008 and an estimated 600,000 of these “piggyback mortgages” remain today (1).

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How banks and regulators kept zombie mortgages alive

So, why do second mortgages have such staying power when so many primary mortgages didn’t?

Second mortgages were a “complication” to modifications undertaken in the wake of the mortgage crisis, according to The Financial Crisis Inquiry Report: “If a first mortgage is modified or foreclosed on, the entire value of the second mortgage may be wiped out” (3). And the country’s biggest banks had substantial amounts of capital tied up in those second liens.

According to a Congressional Oversight Panel Report from April 2010, four banks (Bank of America, Citigroup, JPMorgan Chase and Wells Fargo) had substantial portfolios of these second liens: as of the third quarter of 2009, a collective $442.1 billion. “At the end of that same quarter,” says the same report, “these four banks’ total equity capital was $459.1 billion” (4).

The report goes on to say, “There is a tension between Treasury’s goal of removing second liens as an obstacle to mortgage restructurings and Treasury’s stated interest in maintaining bank capital levels” (4). In other words, providing second-mortgage borrowers with relief might have required another round of bank bail-outs, so Congress prioritized the banks.

Law professor Arthur E. Wilmarth, Jr. who was a consultant for the Financial Crisis Inquiry Commission, puts the numbers even higher, saying that at the peak of the mortgage lending boom in 2007, second mortgages and similar home equity loans accounted for “about $1 trillion” of outstanding debt, of which the four largest banks held $475 billion as of the end of 2008 (5).

As Wilmarth wrote in a 2013 legal paper “if regulators forced the big banks to write down their second liens, it would probably compel the banks to “come back to the federal government for additional bailout money” (5).

How to find out if you have a zombie mortgage

Zombie mortgages are mostly second mortgages, so if you have never taken out such a loan on your home, you probably have nothing to worry about. If you have, and want to make sure there’s no zombie lurking just out of sight to ambush you when you need to tap your equity, there are a few things you can do to put your mind at ease.

The most straightforward way to check if a lien exists on your property is to perform a title search on your property by checking local public records. Search for your address in the local county registry of deeds to ensure no additional loan is attached to your home.

Review your credit report with an eye to old lenders and “charged off” status (which means the debt has been written off, but you are still required to pay it.)

Go back through your files for the right tax form: debts that are forgiven or canceled require a Form 1099-C to be sent both to you and to the IRS. If you never saw a 1099-C for an old second mortgage, it may have been sold rather than forgiven.

Should the worst happen and you receive a letter from a company you’ve never heard of demanding payment for a loan you thought was history, don’t ignore it. Contact a real estate attorney before responding to the debt collector.