The rise of “zombie mortgages,” generally resulting from second mortgages given to homeowners during the housing bubble from 2004 through 2008, are the new mortgage foreclosure headache for Minnesota homeowners. Referred to as 80/20 loans, homeowners were routinely given a first loan to cover 80% of the purchase value of the home, and a second mortgage to cover the other 20%. These second mortgages also often included terms where the interest rate on the second mortgage would skyrocket after two years. These second mortgages were deemed worthless until recently, and many are now being “brought back to life” in debt collection or foreclosure actions against Minnesota homeowners.

The financial crisis of 2008 is still plaguing Minnesota homeowners. As the housing bubble started to collapse during the financial crisis of 2007-2008, millions of homeowners began to lose their homes. Banks had been giving out too many loans, and the interest terms began to mature triggering the higher interest rates. This caused mortgage payments for homeowners to skyrocket and in many cases, homeowners could not afford the increased mortgage payments. This was happening on such a large scale that the federal government intervened by creating a loan modification program to save some homeowners from foreclosure by modifying the loan to lower interest rates to make mortgage payments affordable again. Many homeowners were told their second mortgages were written off or forgiven through this process, and homeowners stopped getting statements on their second mortgages.

Financial institutions began selling these second mortgages off by bundling them with other more valuable loans, sometimes for pennies on the dollar. In 2008, these second mortgages seemed worthless. If the owner of the second mortgage foreclosed on a home, the proceeds from the sale would only be enough to cover the first mortgage debt. So many investors who bought the second mortgages didn’t bother foreclosing on them until recently. When home prices shot up in 2020, it made second mortgages an incredibly valuable investment to owners of second mortgages. Now there is more than enough in foreclosure proceeds to cover both mortgages, and over the span of 15-20 years, debt collectors are claiming these second mortgages have accrued significant amounts in interest and fees.

Owners of second mortgages are now enforcing loans that Minnesota homeowners thought were forgiven years ago and threatening foreclosure. When debt collectors began enforcing these second mortgages, claiming Minnesota homeowners owed tens of thousands on a loans they thought were discharged years ago—it sounded like a scam. Many Minnesota homeowners ignored the notices and have been taken by surprise when a crew of people show up at their door to sell their home. In many cases homeowners never received any kind of communication about these loans for years, and debt collectors retroactively piled on massive amounts of interest and late fees

If you are faced with a Zombie mortgage collection, you should seek the advice of an attorney.  Feel free to call Christensen Sampsel.  We can help.  (612) 473-1200.