Beware The Zombie Mortgage

First, some background:

During the Global Financial Crisis, or “GFC,” in 2007 and 2008, many homes had negative equity. This is when a home is worth less than the outstanding loan value and is common in real estate bubbles, where debt leverage is ubiquitous. There are many reasons for this, including the low cost of debt finance emblematic of our time.

Many home owners during the GFC were forced to walk away from their properties. This phenomenon is colloquially called “jingle mail,” as in when the owner just mails their keys to the bank.

During this period of high leverage that was especially pronounced in the United States, people took out second mortgages on the properties. These seconds were not necessarily the bank who owned the first and received the underwater asset.

After several more years, many people had purchased these assets either from the bank owner or a subsequent purchaser. The original homeowners during the GFC often filed for Chapter 7 bankruptcy, extinguishing any personal liability on the debt secured by the home.

These newer owners may have found that their purchases increased in value. Indeed, the real estate market stabilized after the GFC, and is approaching new highs. The curent market seems like it’s yet in another bubble, but if you made a cheap purchase, you could be looking at equity.

Enter the Zombie Mortgage. Now that the homes are no longer under water, a latent second mortgage from way back in the GFC days has an asset with equity. This mortgage could come back from the dead so to speak.

But wait, I thought there was a bankruptcy, didn’t that extinguish the liens? It only extinguishes the liens with respect to the borrower, but not with respect to the secured property interest. Now, shocked homeowners are having their homes foreclosed upon by the mortgagor on that GFC second due to lack of payment.

Now, if this occurs to you, you should retain counsel immediately as there could be some good defenses available depending on your state. And of course if you find yourself in a situation where bankruptcy might help, seek counsel on a Chapter 13 or 7 bankruptcy potentially.

A diligent title search likely would have uncovered the potential Zombie earlier, so long as the instrument is duly recorded, but it still could be a real shock to come face to face with the Zombie mortgage.

Nothing in this article shall be construed as legal advice. No attorney-client relationship is formed by virtue of this article or the contents thereof. If you need professional assistance please seek the appropriate professionals.