What are zombie mortgages? Do Arizonans need to worry?

What are zombie mortgages? Do Arizonans need to worry?

by Catherine Reagor

The housing boom and crash from almost two decades ago is still a nightmare for homeowners now haunted by zombie mortgages.

Zombie mortgages are debts that homeowners thought were forgiven when home values plummeted, and many lenders stopped collecting on the loans.

Often, the mortgages were part of zero-down loan packages that lenders used to attract borrowers when home prices were soaring. Called 80/20 loans, the main mortgage covered 80% of the price of the home, and the 20% loan, typically a home equity line, covered the down payment.

When struggling homeowners got government-backed loan modifications, it appeared many of the 20% loans went away. But that’s not the case for homeowners now getting foreclosure notices.

Lenders wrote off and sold many of the 20% loans to debt collectors for a fraction of what they were worth, and many of those firms are now trying to collect. A lot of new loan holders are firms that are tacking on years of interest and fees, something regulators are investigating.

Zombie loans not as prevalent in Arizona as other states

What’s good for metro Phoenix homeowners is Arizona has anti-deficiency statutes that protect borrowers from what debt collectors are doing with zombie loans in other states.  

“We are not seeing this (zombie loan collection) happen in Arizona, nor do I believe it’s even possible due to our anti-deficiency statutes,” said housing analyst Tom Ruff with The Information Market, a division of ARMLS. He has tracked Arizona foreclosures for decades.

New York and Florida are seeing a rise in zombie mortgage problems, but they are judicial foreclosure states, meaning lenders and debt collectors use the courts to foreclose.

Arizona is a deed of trust and notice of trustee sale foreclosure state, so foreclosures are handled outside of court, and that makes it more difficult to collect on zombie loans.

Metro Phoenix foreclosures are still historically low, so zombie loans don’t appear to be a problem.

How can homeowners with zombie loans avoid foreclosure?

There are several steps homeowners can take in an attempt to avoid foreclosure because of a zombie mortgage:

•         Pay off the loan. Many homeowners have equity and can take out a home equity or second mortgage loan to pay what they owe.

        Sell the home. This is an option that can net profits for homeowners they wouldn’t get through a foreclosure.

        Negotiate the fees. Homeowners should contact the debt collector and try to work out lowering what they owe. In many cases, the firm bought the mortgage for pennies on the dollar.

        Hire an attorney. Homeowners outside of Arizona are fighting zombie loan collection as illegal.