15 Ways to Fight Foreclosure of Zombie Second Mortgages

As the name suggests, zombie mortgages can be terrifying. They rise from the dead, appear without warning, and seize homes. And they are appearing now more than ever. This article explains what they are, why they are now such a problem, and fifteen ways homeowners can stop foreclosures of zombie mortgages. For even more detail, see Chapter 12 of NCLC’s Home Foreclosures.

What Are Zombie Second Mortgages?

The zombie mortgages that are wreaking havoc today are second mortgages. Many were originated by predatory lenders in the years leading up to the 2007 financial crisis. During that era of frenzied lending, brokers often combined first and second mortgages in a single loan transaction. Referred to as “80-20 mortgages,” the transactions typically financed 80% of the principal balance through a first mortgage and the other 20% through a second mortgage. This kept the first mortgage within a loan-to-value ratio for easy securitization. Careless underwriting and abusive terms led to early defaults on many of these mortgages.

Why Did These Second Mortgages Become Dormant?

Many homeowners struggled to keep up on their first mortgages through the Great Recession, often with the help of loan modifications. In the early years of the Recession, home values dropped precipitously. With so many properties deep underwater, holders of first mortgages faced reduced recoveries if they foreclosed. Second mortgagees, on the other hand, were almost certain to obtain nothing if they decided to foreclose. Not surprisingly, as many homeowners were unable to make payments on second mortgages, the owners of these loans wrote them off.

These “write-offs” were accounting devices used to reflect that the loans had ceased to be income-producing assets. In some cases, the owner of the loan issued an IRS Form indicating that it was seeking favorable tax treatment for a written-off loan. The role of this IRS Form 1099-C is discussed in NCLC’s Collection Actions § 5.2.7.3. 

These accounting adjustments did not necessarily mean that the borrowers were no longer under legal obligations to repay the debts. In most cases, unless some of the legal principles discussed in this article applied, the loan owners retained the option to change their minds and demand payment again. Borrowers did not understand this. Many thought that when their first mortgages were modified, second mortgages were covered as well. Years passed, sometimes well over a decade, and borrowers heard nothing from anyone about the second mortgages.

Why Are Zombie Second Mortgages Coming Back to Life Now?

Zombie second mortgages are coming back to life for simple economic reasons. Now there is home equity for them to feed on. Over the past several years home values have risen significantly in many parts of the country. Homes that were underwater in 2010 now stand well above water, and homeowners’ equity has become an enticing target. Over the years since the Great Recession many homeowners also worked to pay down their first mortgages, further increasing their home equity.

Who Is Foreclosing on These Second Mortgages?

The parties foreclosing on zombie second mortgages are a mix of players, with the original lenders seldom still in the picture. The parties threatening foreclosure today are often debt buyers or their collection agents. Debt buyers purchase pools of defaulted loan accounts, then opportunistically select those to foreclose. They can focus on equity-rich properties and those where they can easily pay off the first mortgage to obtain unencumbered title for themselves.

How Does a Second Mortgage Foreclosure Work?

At the foreclosure sale of a first mortgage, the buyer typically acquires title free of any liens that attached to the property after the date the first mortgage originated. In the case of a second mortgage foreclosure, the buyer at the foreclosure sale does not obtain unencumbered title to the property. The buyer acquires only the borrower’s right to redeem the property from the first mortgage.

If a buyer at the foreclosure sale of a second mortgage wishes to do so, the buyer can pay off the first mortgage and thereby obtain title to the property. Importantly, the foreclosure of a second mortgage means that after the foreclosure the borrower’s right to redeem the property by paying off all the mortgage debts is extinguished. Under most state laws, the purchaser at the foreclosure sale of a second mortgage can proceed to take possession of the property and evict the borrowers. The ability to use the powerful remedy of foreclosure gives a second mortgage debt buyer and its debt collector extremely powerful leverage. NCLC’s Home Foreclosures § 12.1 explores the substantive distinctions between first and second mortgage foreclosures.

15 Ways Homeowners Can Fight Off Zombie Second Mortgage Foreclosures

Resurrecting a long-dormant second mortgage and abruptly threatening to foreclose is a patently abusive practice. When presented with viable defenses and claims, courts should be willing to intervene to protect homeowners.  Chapter 12 of NCLC’s Home Foreclosures describes legal defenses and claims that give courts authority to rein in zombie foreclosures. This article summarizes the most important claims and defenses.

1. The Statute of Limitations

Statutes of limitations can provide a powerful defense to foreclosure of a second mortgage. Under certain state laws, the expiration of the statute of limitations for foreclosure not only bars foreclosure, but also can be a basis for extinguishing the mortgage as an encumbrance on the property.

Examine your state laws to determine the statute of limitations applicable to foreclosures. In a few states the status of the law remains unclear. Appendix E to NCLC’s Home Foreclosures includes summaries of the applicable limitation periods for foreclosures in most states. In many jurisdictions the statute of limitations for foreclosures is equivalent to the limitation period for enforcement of negotiable notes and other written contracts—typically six years.

Other states look to limitation periods for asserting rights in real property. These timeframes based on real property law can be considerably longer, ranging from ten to thirty years. A few states do not recognize any statute of limitations for foreclosure of mortgages or deeds of trust. More detail on individual state statutes of limitations for foreclosures is discussed in NCLC’s Home Foreclosures § 5.3.1.

The first step is to determine the statute of limitations. The second step is to determine when the statute of limitations begins to run under the state’s law. For mortgages and deeds of trust there are three potential trigger events to consider:

• The due date of each unpaid installment may start a limitation period running for collection of that installment. This limitation can preclude claims for many of the older installments due on a loan that was never accelerated and remained inactive for many years.
• A loan owner’s acceleration of the loan makes the entire loan balance due immediately and starts the statute of limitations running for the entire debt if not paid. Factual and legal issues can arise in proving whether and when an acceleration occurred. These issues are discussed in NCLC’s Home Foreclosures § 5.3.2.
• The loan’s reaching its contractual maturity date for payment of the entire debt makes any remaining unpaid balance due immediately, and like acceleration, triggers the running of the statute of limitations for the entire unpaid sum.

NCLC’s Home Foreclosures § 12.2 discusses statutes of limitations with a specific focus on defending second mortgage foreclosures.

2. Challenging Authority to Foreclose a Second Mortgage

The party foreclosing a second mortgage must have authority to enforce the underlying contractual documents, the note and mortgage. NCLC’s Home Foreclosures Chapter 2, Chapter 3, and Chapter 4 provide extensive analysis of authority to foreclose. The basic concepts covered there apply to second mortgage foreclosures as well.

Debt buyers who acquire pools of defaulted second mortgages are unlikely to have systems in place that larger mortgage servicers use to document transfers of negotiable notes and account histories. A request for information (RFI) under RESPA regarding loan ownership and possession of the relevant contract documents can build a successful challenge to a party’s authority to foreclose a second mortgage. See NCLC’s Home Foreclosures § 12.3. Sample RFI letters inquiries about second mortgages are available here.  

3. Claims Under TILA and RESPA

Claims under TILA and RESPA can be raised against the owners and servicers of zombie second mortgages. Junior mortgages are not exempt from most of the important TILA and RESPA provisions, although some requirements do not apply to HELOC loans. NCLC’s Home Foreclosures § 12.4 discusses coverage of second mortgages under TILA and RESPA.

Both TILA and RESPA allow claims for statutory penalties, compensatory damages, and attorney fees. These laws also establish an important industry standard—that owners and servicers of mortgage loans must keep borrowers regularly informed about the status of their loans. Claims under TILA and RESPA can include:

• TILA transfer of loan ownership notices. Effective in 2009, provisions of Regulation Z require that new owners or assignees of mortgage loans inform borrowers of a transfer of loan ownership within thirty days after a loan is sold. 12 C.F.R. § 1026.39(b), implementing 15 U.S.C. § 1641(g). These regulations are discussed in detail in NCLC’s Mortgage Servicing and Loan Modifications § 4.2.7. Transfer of ownership notices must provide specific information that borrowers need to understand their current payment obligations. Failure to inform borrowers of sales of their loans contributes to the expectation that there is no need take action regarding an ongoing payment obligation. See NCLC’s Home Foreclosures § 12.4.2.
• RESPA notice of transfer of mortgage servicing rights. A transfer of servicing rights for a second mortgage triggers obligations under RESPA for both the transferor servicer and the transferee servicer to provide a timely notice to the borrower. 12 U.S.C. § 2605(b); Reg. X, 12 C.F.R. § 1024.33(b). NCLC’s Mortgage Servicing and Loan Modifications § 3.4 discusses this requirement in detail. In addition to contact information for the new servicer, the notice must state when the new servicer will begin to accept payments. Failure to give timely notice deprives a borrower of another important tool for ascertaining the status of an account. See NCLC’s Home Foreclosures § 12.4.2.
• The TILA periodic statement requirements. Amendments to the TILA periodic statement rule were designed to prevent the surprise appearance of a long-dormant second mortgage together with unexpected claims for years of accrued interest and fees. See Reg. Z, 12 C.F.R. § 1026.41, implementing 15 U.S.C. § 1638(f). Under the rule, servicers must keep borrowers informed about the status of a second mortgage, including whether it has been charged-off or re-activated for collection, as well as who currently owns the loan and how to contact appropriate parties for up-to-date information. The rule requires heightened periodic statement disclosures when the loan is in arrears.  NCLC’s Mortgage Servicing and Loan Modifications § 4.2.5. The initial version of this periodic statement rule went into effect in February 2014. Amendments effective in October 2017 added requirements for disclosing the charged-off status of a loan and for giving notice before collection on a charged-off loan resumed. 12 C.F.R. § 1026.41(e)(6). The amended rule bars collection of interest and fees that a lender alleges accrued after the lender gave notice of charge-off and before it gave notice of resumption of payments. 12 C.F.R. § 1026.41(e)(6)(ii)(B). See NCLC’s Home Foreclosures § 12.4.3.
• TILA rescission. A successful TILA rescission voids a lender’s security interest in the borrower’s real property, effectively barring a foreclosure. See NCLC’s Truth in Lending Ch. 10. Second mortgages may be particularly susceptible to rescission claims when they come with faulty disclosures and did not finance a home purchase. However, zombie mortgages may present statute of limitations problems unless the borrower can rely on certain recoupment principles or has access to more favorable state law rescission rights.  See NCLC’s Home Foreclosures § 12.4.4. 

TILA and RESPA claims may be limited by their respective statutes’ limitation periods, although these claims in some states can be raised by way of recoupment in a foreclosure proceeding. TILA and RESPA claims also raise questions as to the proper defendant in the action. But, as described in items #5 and #6, infra, the TILA or RESPA violation can form the basis for contract claims under the mortgage loan agreement as well as UDAP and FDCPA claims.  TILA and RESPA violations also provide support for state law negligence and fraud claims.

4. The Fair Debt Collection Practices Act

The Fair Debt Collection Practices Act (FDCPA) prohibits unfair or deceptive debt collection activities. Seeking to collect a sum that is not lawfully owed or enforcing a security interest when there is not a present right to do so violates these FDCPA prohibitions. See NCLC’s Fair Debt Collection §§ 7.4.11, 8.3, and 8.6. Upon proving an FDCPA violation, borrowers can recover statutory penalties, damages, and attorney fees. 

Owners of zombie second mortgages and their attorneys may qualify as “debt collectors” under the FDCPA. NCLC’s Fair Debt Collection § 4.7.3.4. Servicers of zombie second mortgages may qualify as debt collectors as well if, as is likely, they acquired servicing rights after the loan went into default. NCLC’s Fair Debt Collection § 4.7.5.2.3. Some limited exceptions to FDCPA coverage may apply to certain entities when they engage only in essential non-judicial foreclosure activities and do not demand payment. NCLC’s Fair Debt Collection § 4.7.5.3. 

In 2023, the CFPB published a helpful Guidance on the applicability of the FDCPA to certain debt collection practices involving zombie second mortgage debt. See CFPB, Fair Debt Collection Practices Act (Regulation F); Time-Barred Debt, 88 Fed. Reg. 26,475 (May 1, 2023).  This CFPB guidance is discussed in NCLC’s Home Foreclosures § 12.4.4a. 

5. Contract-Based Claims and Defenses

Standard loan documents contain terms that obligate lenders to comply with applicable federal and state laws if they wish to foreclose. See NCLC’s Mortgage Servicing and Loan Modification § 5.5 (discussing requirement to comply with “applicable law” as term of standard GSE security instrument). As “applicable laws,” TILA and RESPA impose duties on lenders and their servicers to communicate with borrowers and provide them with specified information. This information includes when to make payments, how much to pay, and where to send payments. See #3, supra.

Framing these obligations as contractual conditions to a foreclosure avoids potential TILA or RESPA statute of limitations defenses and disputes over who is a proper party defendant that can arise when the borrower relies exclusively on the TILA and RESPA regulations. See NCLC’s Home Foreclosures § 12.6.

6. Negligence-Based Claims and Defenses

Tort-related claims arising from mortgage servicing and foreclosures often focus on negligence-based theories. State courts vary in their willingness to hold mortgage servicers to a duty of care to avoid negligent conduct. See NCLC’s Mortgage Servicing and Loan Modifications § 10.5.6.  In jurisdictions that recognize such a duty, borrowers can point to the many federal statutes and regulations that impose obligations on mortgage servicers to communicate regularly with homeowners.  Mortgage servicers agree to comply with these obligations when they undertake to service a loan. 

The assumed duties include the ongoing disclosure of accurate information about the account. A servicer’s choice to remain silent and allow interest and charges to grow to the point where it becomes impossible for the borrower to plan to repay an arrearage flagrantly disregards these duties. The conduct harms the borrower by making foreclosure inevitable. See NCLC’s Home Foreclosures § 12.7.

7.  Defenses and Claims Based on State UDAP Statutes

Federal and state laws impose affirmative obligations on owners of second mortgages and their servicers to disclose changes of loan ownership and servicing rights as well as details about an account’s current status. Violations of TILA, RESPA, and other federal and state laws that mandate regular disclosures of loan information to borrowers can be the basis for effective claims under state unfair and deceptive acts and practices (UDAP) statutes. See NCLC’s Unfair and Deceptive Acts and Practices § 6.4.1. 

Borrowers have strong arguments that the practice of lying in wait while systematically failing to communicate before a foreclosure meets both the “unfair” and “deceptive” standard under the state UDAP statutes. See NCLC’s Unfair and Deceptive Acts and Practices §§ 4.2.15, 4.3.3, 4.4. Not all state UDAP statutes apply to financial institutions and foreclosures. However, many do and can authorize wide-ranging relief, including equitable remedies. See NCLC’s Home Foreclosures § 12.7.

8. Laches and Equitable Defenses to Second Mortgage Foreclosures

Equitable defenses to foreclosure may be available when the owner of a zombie mortgage seeks to foreclose after the account has remained inactive for many years. The foreclosure may be barred under the doctrines of unclean hands or laches. The elements of laches under a typical state law are: (1) the creditor’s knowledge of the cause of action, (2) an unreasonable delay in commencing the action, and (3) harm resulting from the unreasonable delay. Under the laches doctrine, foreclosure can be barred even when the statute of limitations to foreclose has not expired. See NCLC’s Home Foreclosures § 12.8.2. 

Borrowers who believed their loans had been written off or modified and could not communicate with anyone about the loan for years may have foregone timely options to address the loan default, such as through loss mitigation. Borrowers can also be harmed when years of delay have led to the disappearance of evidence needed to defend against a foreclosure. See NCLC’s Home Foreclosures § 12.8.4.

9. State Law General Foreclosure Requirements

Each state sets requirements for conduct of a valid foreclosure. A discussion of general state foreclosure laws and their applicability to second mortgages is found at NCLC’s Home Foreclosures § 12.9.

A foreclosing party must typically have the right to enforce a mortgage or deed of trust and the related promissory note. The party must designate a default, give specific notices, and identify the amount owed. NCLC’s Home Foreclosures Chapter 5 and Chapter 8 discuss procedural challenges in the context of first lien mortgage foreclosures that may apply to second mortgages as well. State statutes may impose a good faith obligation on mortgage servicers or require transparency in pre-foreclosure loss mitigation reviews. See NCLC’s Home Foreclosures § 5.13.2.4.2. 

The Massachusetts Attorney General recently won extensive relief against a zombie mortgage investor on behalf of a statewide class of borrowers. The Massachusetts AG’s complaint focused on the investor’s pattern of non-compliance with a state statute that obligated lenders to review borrowers for mortgage modifications before they foreclosed on certain mortgages. See Massachusetts Attorney General Assurance of Discontinuance in Franklin Credit Management (Sept. 26, 2024).  Investigate state foreclosure laws to determine whether all procedural requirements, such as participation in settlement conferences and mediations and review for loss mitigation, apply to second mortgages in the same way they do to first mortgages.

10. State Laws That Specifically Regulate Second Mortgages

Thirteen states have enacted statutes specifically designed to regulate second mortgages. These statutes are discussed generally at NCLC’s Home Foreclosures § 12.10.1 and a state-by-state analysis is found at § 12.10.2. Several of these statutes limit default-related charges. Others set guidelines for second mortgage loan origination and require special licensing. Violation of these origination laws may give rise to recoupment claims against debt buyers.

11. Bankruptcy Remedies Applicable to Zombie Second Mortgages

In addition to the reprieve from foreclosure activity through the automatic stay, bankruptcy offers homeowners who file for relief under chapter 13 the opportunity to object to a second mortgagee’s claim. The homeowner can challenge amounts owed when a statute of limitations bars all or some of the creditor’s claim. Recoupment is also available despite statutes of limitations on a homeowner’s affirmative claims against the creditor. When the first lien mortgage and other senior encumbrances exceed the property’s value, the homeowner can “strip off” the junior mortgage in a chapter 13 case, making the loan balance a dischargeable unsecured debt. NCLC’s Home Foreclosures Chapter 9 discusses other ways to deal with mortgagees in bankruptcy. A discussion of bankruptcy’s application specifically to second mortgages is found at NCLC’s Home Foreclosures § 12.11.

12. Loss Mitigation Options for Junior Mortgages

Loss mitigation options created by the major federal guarantors and insurers of mortgage loans can be critically important tools for preserving homeownership. However, certain options, including many modification programs, are available only for first mortgages. Nevertheless, many forbearance options apply to all federally backed mortgages regardless of their lien position. NCLC’s Home Foreclosures § 12.5 outlines the major servicing options that cover junior mortgages.

13. Issues Involving Deficiency Claims Specific to Second Mortgages

Second mortgages can present unique problems related to post-foreclosure deficiency claims. For example, borrowers may find that they are liable for a deficiency claim on a junior mortgage after the senior mortgage has been foreclosed. Nevertheless, state anti-deficiency statutes may protect borrowers from these claims. NCLC’s Home Foreclosures § 10.4 contains a general discussion of issues related to post-foreclosure deficiency claims. NCLC’s Home Foreclosures § 12.12 provides state-specific examples of the scope of state anti-deficiency protections for second mortgages.

14. Recoupment Strategies Against Zombie Seconds

A homeowner’s legal claims arising from zombie second mortgages tend to deal with actions that took place many years ago—even a decade or more ago. At the same time, statutes of limitations for consumer claims tend to be short, often one to three years for important federal statutory claims, such as those under TILA, RESPA, and the FDCPA. 

Recoupment is a doctrine that in certain situations allows a consumer to pursue legal claims that would otherwise be time-barred. Through recoupment a debtor can assert time-barred claims defensively against a creditor as an offset to the creditor’s claims against the debtor, as long as all the claims stem from the same transaction. See NCLC’s Home Foreclosures § 12.12a. 

Recoupment is generally available for consumers in two contexts. In bankruptcy, recoupment permits a debtor to assert time-barred legal claims against a party who has a claim in the bankruptcy case. A borrower who is a debtor in bankruptcy can bring claims in recoupment up to the amount of the second mortgagee’s claim in the bankruptcy case. 

The other option is to use recoupment in response to a judicial proceeding that the second mortgagee initiated against the borrower. This recoupment could be in response to a judicial foreclosure or an action for a deficiency. 

15. Defenses and Claims Related Specifically to HELOC Loans

Certain second mortgages are structured as open-end home equity lines of credit, or HELOC loans. Under a HELOC, the borrower takes out advances during a “draw period” until the principal balance reaches a monetary cap. The loan documents typically provide for a fixed repayment period for the full loan balance. This repayment term may be tied to when the borrower reaches the borrowing cap.

HELOCs can present several distinct legal issues. First, because a HELOC does not establish a fixed debt obligation at loan origination, most courts do not consider HELOCs to be negotiable instruments. This can complicate a foreclosing party’s burden to establish that it has authority to foreclose. Unlike negotiable notes, non-negotiable promissory notes, such as HELOCS, are not self-authenticating. See NCLC’s Home Foreclosures § 2.2.4.3.  

A party claiming the right to enforce a non-negotiable note must be able to document the chain of past transfers of the loan documents. The heightened evidentiary burden to show authority to foreclose a non-negotiable note is discussed in NCLC’s Home Foreclosures § 2.4. 

Second, different statutes of limitations may apply to enforcement of negotiable and non-negotiable notes. In some jurisdictions, the limitation period to enforce a non-negotiable note may be shorter than the period for a negotiable note. A HELOC’s repayment term can also be shorter than for a typical fixed obligation mortgage. 

Third, certain obligations under statutes such as TILA and RESPA do not apply to open-end credit transactions, such as HELOCs. When a HELOC is at issue, check coverage before raising these statutory claims. HELOC coverage under federal consumer protection statutes is discussed in NCLC’s Home Foreclosures § 12.4.1. 

Additional Zombie Debt Resources 

NCLC’s Trending Topics Page for Zombie Second Mortgages, open to the public, has articles, court decisions, model legislation, videos, key weblinks, sample letters, complaints, other pleadings, written submissions by speakers at past NCLC conferences (open to legal aid, NACA, and recent NCLC conference attendees), and links for subscribers to further discussion in NCLC treatises.

The NCLC/NACA 2025 Mortgage Conference, to be held in Los Angeles June 8 – 10, is certain to include sessions on the latest concerning zombie second mortgages.

The NACA/NCLC 2025 Spring Training, to be held April 29 – May 3 in Long Beach California, is also likely to cover topics related to zombie second mortgages.

Relevant sections of NCLC treatises are linked above, and subscriptions are available at nclc.org/bookstore.