In the wake of the 2008 financial crisis, countless Americans faced the grim reality of foreclosure. Yet, for some, the financial nightmare didn’t end with the loss of their homes. Years, even decades later, some find themselves haunted by “zombie” loans: old, supposedly settled debts that suddenly come back to life, demanding payment, sometimes through litigation.
What Is a Zombie Loan?
A zombie loan refers to a debt a borrower thought was dead and buried but is later resurrected by a financial institution or a debt collector. This phenomenon is particularly common with second mortgages taken out during the housing bubble leading up to the financial crisis. Some borrowers who lost their homes in the turbulent waters of foreclosure, often thinking their ordeal was over, are shocked to receive notices demanding payment — and sometimes lawsuits — on these previously silent loans, sometimes even 15 years later.
Why Do Zombie Loans Arise?
The roots of zombie loans lie in the complex financial products of the era before the subprime mortgage crisis, such as “piggyback“ mortgages—where a second, 20% mortgage was taken simultaneously with the primary 80% mortgage to cover a down payment, thus avoiding private mortgage insurance. When the bubble burst in 2008, primary mortgages were often foreclosed on, while second mortgages went unpaid, sometimes unnoticed, as their collection was deemed financially unviable or simply overlooked amid the chaos.
Over time, as property values recovered and equity rebuilt, these dormant debts became attractive targets for collection. Debt buyers, purchasing these loans for pennies on the dollar, saw an opportunity to profit by pursuing borrowers for the full amount owed, plus many years of interest and fees, leveraging the threat of legal action to compel payment.
Who Is Affected?
The victims of zombie loans are typically home buyers who believed their foreclosure resolved all outstanding mortgage debts. Years later, they are blindsided by claims on debts they thought were extinguished, putting their financial stability and current home equity at risk.
How Do Zombie Loans Affect People?
The impact of being pursued for a zombie loan can be profound and distressing. Homeowners may face the threat of new legal action or be forced to defend one, as well as potential financial ruin over debts they believed were settled. This can lead to significant emotional stress, confusion, and a sense of injustice, as they struggle to defend against claims on long-dormant debts.
Defenses Against Zombie Loans
However, there are defenses available to those facing the specter of a zombie loan. For one, to show they have standing to sue, lenders must have a sufficient chain of assignment agreements, without which, a case can be dismissed. Additionally, the principal of res judicata can bar creditors in some instances from suing on a debt that could have been included in a previous action—such as a foreclosure lawsuit. If a lender had the opportunity to address a second mortgage in an earlier foreclosure but did not, they may be prevented from pursuing it later. Third, statutes of limitations will regulate how long creditors have to sue for unpaid debts. If this period has passed, the debt may be unenforceable.
While every case is unique and requires careful legal evaluation, these and sometimes other defenses offer hope to those facing unjust claims on zombie loans.
Need Legal Assistance?
If you or someone you know is being pursued for an old, resurrected zombie loan following a foreclosure many years ago, it’s crucial to seek legal advice. We have represented clients in defending these resurrected claims and can help assess your situation to identify the best course of action. Remember, you’re not alone, and there are legal pathways to fight back against the injustice of zombie loans.
For more information or to schedule a consultation, email us through our contacts form or call us at 407-965-5519. Let’s put these zombie loans to rest, once and for all.
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