Zombie mortgages are second mortgages or home equity loans that homeowners thought were satisfied long ago but still exist. Because these mortgages come back to life after several years they are referred to as zombie second mortgages.

How were Zombie Mortgages Created?
In the early 2000s, lenders offered “piggy back” mortgages, also known as “80/20” mortgages. At that time, home buyers could take out one loan for 80% of the purchase price of a home and a second mortgage for the remaining 20% of the purchase price. This was done to avoid PMI and reduce up front cash requirements for borrowers. Lenders frequently bundled the first and second mortgages into one transaction – but with two  loans. Most homebuyers did not understand that they had two loans.

During the housing crisis of 2008, many mortgages went into foreclosure.  Most lenders did not focus on collecting the second smaller (20%) loan because it was expensive to go to court to collect on loans and lenders knew that the larger (80%) first mortgage would be first in line for payment.  These old debts were eventually written off by the lender, repackaged and sold to debt collectors for pennies on the dollar. The homeowner assumed the loans were discharged. 

Fast forward 20 years and these homes now have equity built up. Debt collectors began pursuing repayment and/or foreclosure on these zombie loans that homeowners thought were discharged. 

What Protections Do Homeowners Have?

Virginia law specifically enacted legislation that strictly regulates how holders of “zombie” second mortgages can collect on long-dormant debts. 

Key Virginia Statutes and Protections:

• Proof of Communication Required: Under Virginia law, if a lender or debt collector intends to foreclose on a mortgage to collect on the debt, they must provide documented evidence that they have actively attempted to collect the debt over the years. They cannot suddenly foreclose if they have been entirely silent, failed to send regular bills, or failed to notify the homeowner of mounting interest and fees.
• Statute of Limitations: In Virginia, the statute of limitations to sue on a written contract or enforce a mortgage is 5 years. Once this time limit expires, the lender is legally barred from suing you to collect the debt.

Federal Protections
In addition to Virginia state law, the Consumer Financial Protection Bureau (CFPB) warns that it may be a violation of the Fair Debt Collection Practices Act (FDCPA) for a debt collector to threaten or bring a foreclosure action on a mortgage where the state’s statute of limitations has already expired. 

The CFPB issued an advisory opinion regarding prohibitions for debt collectors trying to collect on a zombie mortgage. The opinion states 

“The CFPB is issuing today’s advisory opinion in light of a series of actions by debt collectors attempting to foreclose on silent second mortgages, also known as zombie mortgages, that consumers thought were satisfied long ago and that may be unenforceable in court. “We are making clear that threatening to sue to collect on expired zombie mortgage debt is ill

If you are contacted by a debt collector about a zombie mortgage, contact an attorney with experience in real estate  or consumer protection law to determine if the debt is valid and if the statute of limitations has passed.