It has been 17 years since the financial crisis of 2008. It is again time to look at “zombie mortgages.” With the passage of time, property values have, for the most part, increased. In some cases, there has been dramatic appreciation. This makes it attractive for junior lenders to seek to recover as much as possible from these obligations.
Zombie mortgages are mortgages thought to be forgiven or satisfied long ago but still legally exist. These debts may have been written off by the lender and sold for pennies on the dollar to debt collectors. Sometimes the mortgage company goes silent and stops sending statements or communicating altogether. Years later, a debt collector reaches out to collect on the debt. Because these mortgages seem to reappear after being considered “dead” or gone for so long, they’re sometimes called “zombie” mortgages. (See Consumer Financial Protection Bureau, consumerfinance.gov 2024).
How did these mortgages originate? Back in 2005 and 2006 during the housing bubble, financial institutions, including Wall Street, encouraged home borrowing. See for a good description the 2015 movie “The Big Short”. So instead of offering one mortgage with a down payment to acquire a home, two mortgages were offered. The first mortgage covered 80% of the purchase price, and a second mortgage covered the 20% down payment. Sometimes the second mortgage had an adjustable interest rate. This was the “nothing down” promotion to sell houses. When the housing bubble burst in 2008, residential housing values plummeted, and there no longer was equity to cover the second mortgage. Many lenders wrote off the loans as worthless and stopped sending notices to the homeowners or attempt collection. In the meantime, the mortgages remained as liens and fees and interest continued to accrue.
A 2024 NPR investigation found that in Maryland, “at least 500 people facing foreclosure from what appears to be long dormant second mortgages.” Further NPR found across several states there were at least 10,000 people subject to old second mortgages from the housing bubble, and where a company was taking the first steps toward foreclosure. (See NPR “Zombie 2nd mortgages are coming to life, threatening thousands of American homes”, May 18, 2024).
A homeowner who wants to remain in their home has some options when faced with collection efforts by a zombie mortgage lender. See for example: “15 Ways to Fight Foreclosure of Zombie Second Mortgages.” (NCLC Digital Library, G. Walsh, December 9, 2024) This article summarizes these strategies: 1) Statute of Limitations, 2) Challenging Authority to Foreclose, 3) Claims Under TILA and RESPA, 4) Claims Under the Fair Debt Collection Practices Act, 5) Contract-Based Claims and Defenses, 6) Negligence Based Claims and Defenses, 7) Defenses and Claims Under State Unfair Practices Acts, 8) Laches and Equitable Defenses, 9) State Law General Foreclosure Requirements, 10) State Laws That Specifically Regulate Second Mortgages, 11) Bankruptcy Remedies Applicable to Zombie Second Mortgages, 12) Loss Mitigation Options Available for Junior Mortgages 13) Issues Involving Deficiency Claims Specific to Second Mortgages, 14) Recoupment Strategies Against Zombie Seconds, 15) Defense and Claims Related Specifically to HELOC Loans.
Should chapter 13 bankruptcy be utilized as a vehicle to defend against a zombie mortgage, whether through a claim objection or to seek to strip off the lien, it is important for a mortgagor-debtor to act fast. Do not wait until judgment is entered, or state action completed to a final order. If that happens the bankruptcy court may be subject to issue or claim preclusion. See In re: Adams 151 F4th 144 (3rd Circuit Sept 2025).
For the purposes of this article, let us focus on one strategy to defend and object to collection of the zombie mortgage: that is, challenging the authority of the debt collector to enforce the mortgage. Considering the passage of time since the second mortgages were executed, it is possible there may be defects or insufficiencies in the documents or assignments of the note and mortgage. Many times, these loans were bundled and packaged into securities. Assignments were made. Each of these consisted of complicated transactions and under most state laws required to be documented and recorded. Production of all applicable documents should be requested with careful review to assess available defenses.
In a 2017 case involving a first mortgage under state law, the Delaware Supreme Court held that a mortgage assignee must be entitled to enforce the underlying obligation which the mortgage secures to foreclose on the mortgage. The note and mortgage as well as the servicing of the loan had been transferred several times. The original mortgagee was Countrywide Home Loans, Inc., with Mortgage Electronic Registration Systems, Inc. (MERS) as a nominee. Subsequently, the loan was assigned to the Bank as Trustee for the Certificate Holders of CWMBS. Inc., CHL Mortgage Pass Through Trust 2007-9, Mortgage Pass-Through Certificates, Series, 2007-9. Sometime thereafter Residential Credit Solutions, Inc serviced the loan. The debtors requested a copy of the note and any assignment, and the only document produced was the original note given to Countrywide. No assignment was ever produced. Without evidence that the foreclosing party had the right to enforce the note, the Court held it did not have the right to foreclose. See Shrewsbury v The Bank of New York Mellon 160 A3rd 471 (Del Supr. 2017).
In another case in Delaware, the Bankruptcy Court held a mortgage not enforceable and rendered unsecured. In this case the original creditor had failed to record the mortgage, and therefore was unperfected at the time the bankruptcy was filed. The Court denied the request to record the mortgage post-petition and the claim was deemed to be treated as unsecured. See in In re: Sosnowski 314 BR 23 (Del Bankr. 2004).
Each of these cases illustrate the potential issues that may be found in instruments and assignments applicable to zombie mortgage claims. If in bankruptcy, state law may be viewed for any defects in drafting, execution, assignment, and recordation. The strong-arm power of Bankruptcy Code Section 544 is a powerful tool. The bottom line is zombie mortgages are not actually dead and most may be collectible. Nevertheless, it is important for counsel and trustees to carefully review and analyze the claims.
(Printed with permission, NACTT Academy, Considerchapter13.org, November 30, 2025)