A Zombie Mortgage?
In a shocking turn of events, Teresa, a single mother from Los Angeles, discovered she owed $180,000 to the Statebridge Company, a name she had never encountered until receiving a demand letter in January.
The notice warned that an initial payment of $50,000 was required to avoid foreclosure. The root of this financial nightmare? A long-forgotten second mortgage that Teresa believed was settled years ago.
Back in 2009, following a divorce, Teresa modified her mortgage loan and assumed that her second mortgage had been incorporated into her primary mortgage payments. “It’s beyond scary,” she told CBS. “To know that there might be a moment where we may have to move. And given the real estate prices and the rental prices in southern California … I can’t afford to live in California anymore if I can’t stay in my current home.”
Efforts to negotiate with Statebridge have so far been unsuccessful. The company remains adamant about collecting the 15-year-old debt in full.
A Widespread Problem
Teresa’s plight is not an isolated incident. She is among thousands of Americans grappling with so-called “zombie mortgages” — second mortgages that resurface unexpectedly after homeowners believe they have been paid off. These dormant debts are often sold to debt collectors who then demand repayment, often adding retroactive interest and fees.
Many borrowers, like Teresa, thought these loans were resolved years ago and received no communication indicating that the loans were still active. Teresa expressed her disbelief to CBS News, stating, “When I looked at this, and I, I mean, I didn’t recognize it. I didn’t know what it was from.”
Between 2009 and January 2024, Teresa received no statements or communications about this debt. Federal law mandates that lenders send statements for home loans, but compliance is not always consistent. This oversight is causing problems nationwide. An NPR investigation revealed at least 10,000 old second mortgages in New York with recent foreclosure activity. Similarly, in Maryland, NPR identified at least 500 loans in default for over a decade, with foreclosure proceedings initiated.
Protecting Yourself from Zombie Mortgages
To safeguard against the surprise of a zombie mortgage, homeowners need to understand that these typically involve second mortgages. These loans, often used for home repairs, upgrades, or other significant expenses, allow homeowners to tap into their home equity. If you’ve never taken out a second mortgage, you can rest easy.
For those who have, start by checking your county’s public property records, usually accessible for free online. Searching for your city or county along with “public property records” should direct you to the appropriate site. Look for any liens or notices of default on your property. If you find a deed of reconveyance, it usually means the mortgage has been satisfied.
Another crucial step is reviewing your tax returns. If a second mortgage was canceled, the lender should have sent you a 1099-C form, indicating a cancellation of debt. This form must be included in your tax return and signifies that the second mortgage has been resolved.
If you discover a zombie mortgage, it may be wise to consult a lawyer. Certain states have laws that limit the timeframe in which debt collectors can take action. For instance, California has a four-year statute of limitations on most types of debt.
Navigating the Financial Quagmire
The resurgence of zombie mortgages has put many homeowners in a precarious position. As Teresa’s case highlights, these forgotten debts can resurface without warning, threatening financial stability and homeownership. It underscores the importance of staying vigilant with financial records and understanding the potential long-term obligations tied to mortgages.
For Teresa and others facing similar situations, the path forward involves legal consultation and navigating state-specific debt collection laws. The hope is that increased awareness and legal safeguards will prevent more homeowners from being blindsided by these unexpected financial burdens.
In the meantime, Teresa’s story serves as a cautionary tale, reminding homeowners to keep a close eye on their mortgage documents and stay informed about their financial obligations. As this issue garners more attention, it may prompt legislative action to better protect consumers from the hidden traps of zombie mortgages.
