After the financial crisis of 2008, many loans were forgiven under a $25 billion national mortgage settlement that targeted foreclosure practices and other mortgage abuses by banks.
Some of those loans — now called zombie loans — reportedly were sold to debt buyers for pennies on the dollar, even though many of the homeowners received tax notices earlier that showed the debts had been canceled.
U.S. Sen. Elizabeth Warren of Massachusetts is seeking documentation related to those loans, Realtor.com reported.
“These zombie mortgages arise from second mortgages or HELOCs that homeowners believed were canceled in the wake of the Great Financial Crisis,” said Joel Berner, senior economist at Realtor.com. “The original lenders stopped collecting payment on them, but when they are sold to debt purchasers, they ‘come back to life’ and homeowners are faced with bills they didn’t expect or even the threat of foreclosure.
Berner said the practice has created new issues for those borrowers.
“This adds uncertainty to the prospect of homeownership, which is already an affordability challenge for many,” Berner said.
Were Consumer Protection Laws Broken?
Realtor.com said that some collection agencies regularly broke consumer protection laws by charging years of back interest on these zombie mortgages for periods when no statements had been issued, according to a report by Bloomberg.
In some cases, homeowners were foreclosed on despite having tax documents showing their loans had been canceled years before.
“I am concerned that banks may have received credit for extinguishing second mortgages in the settlement, when in fact they sold those loans to debt collectors,” Warren wrote in her letter to Joseph A. Smith Jr., independent monitor of the 2012 settlement between the Department of Justice, 49 state attorneys general, and the largest mortgage servicers.
Bloomberg reported that it examined more than 5.5 million piggyback mortgages that were issued between 2002 and 2008, and estimated that 600,000 of these old second mortgages remain.
Some financial institutions may have sold debts that were uncollectible, according to records reviewed by Bloomberg.
“A debt buyer may purchase a portfolio for pennies, then send payoff letters that inflate principal with fees,” Chad D. Cummings of Cummings & Cummings Law in Florida told Realtor.com. “A $15,000 old second mortgage can become a $45,000 demand.”
Warren said she is concerned about zombie mortgages, and she wants answers.
“There have been numerous cases of homeowners who had stopped receiving statements on their second mortgage, received tax documents saying their second mortgage was cancelled, or had the loans removed from their credit reports, and then learned that the second mortgage was still active,” Warren wrote in her letter to Smith.
“Companies purchased millions of dollars of these second mortgages—and waited to collect until home prices rose,” Warren wrote. “Now, Americans who thought they were doing everything right learned, in many cases many years later, that debt collectors seeking to exploit the increase in their home valuations were going to foreclose on their homes.”
Warren Wants Records on Second Mortgages
Warren has requested that Smith provide records related to the second mortgages that were extinguished under the terms of the National Mortgage Settlement, as well as all communications between Smith and the banks related to the extinguishment of second mortgages by Jan. 7.
“Sen. Warren’s proposal is interesting in that the mortgage enforcement historically belongs to state law, not federal law,” Cummings said. “States control recording systems, foreclosure procedures, statutes of limitation, and lien priority. Federal law touches lending disclosures and debt collection, but it rarely rewrites who owns a lien or how title clears.”
California, Connecticut, and Virginia recently passed laws to address abuses tied to zombie mortgages.
A Massachusetts bill is under review by the state’s judiciary committee, and Maryland lawmakers plan to introduce similar legislation this year, Realtor.com said.
“The bottom line is that zombie mortgages are a huge issue, and will get even bigger in 2026 and beyond,” Cummings said. “The only question is whether it makes sense to enforce this federally or at the state level.”
