Zombie Second Mortgage Huant Homeowners

Zombie “Second Mortgages” Haunt Unsuspecting Homeowners

Foreclosure Nightmares

A second mortgage included in bankruptcy can foreclose years after it has been discharged, and can cost you a lot of money!

As an expert in helping homeowners and homebuyers qualify for home loans after a bankruptcy, foreclosure, short sale or deed in lieu, I talk to folks all over the Country every single day about the challenges of recovering from financial hardship.

A nightmare trend that I am seeing more and more often, is Zombie second mortgages rising from the past to haunt unsuspecting homeowners by starting foreclosure proceedings, and threatening your ability to stay in your home that you fought so hard to keep.

Just when you thought you were safe to start your financial life over again, and continue to live in your home without the fear of a toxic mortgage, out jumps this second lien holder, trying to get their money back by foreclosing on your home.

I Thought The Mortgage Was Discharged?

If you had a second mortgage when home values plummeted in the recent past, chances are that your home value was upside down, and there wasn’t even enough equity in the home to cover the second mortgage.

Unfortunately, many bankruptcy attorneys told homeowners that by including the mortgage in the bankruptcy that you are no longer responsible for it.  That’s not exactly true.  The truth is, you are not responsible for the mortgage, but the lender still has a lien against your home.  If you stop making payments on your mortgage, the lender has the right to foreclose.

many homeowners continued to pay the first mortgage, and stopped paying the second mortgage years ago

Based on this inaccurate information from the bankruptcy attorney, I speak to many homeowners that have continued to pay the first mortgage on time for years, and stopped paying on the second mortgage years ago.

During the initial fall-out of the crisis, the second mortgage couldn’t do anything because there was no equity in the home.  If a second lien holder initiates a foreclosure, the first mortgage holder gets their money first, and if there’s anything left over, the second lien holder can recuperate part, or all of what’s owed to them.

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Here are are, almost 10 years since the beginning of the crash, and home values have jumped back up, very close to where they were in 2006.  At least that’s what happened in California, where I live.

Now that there is equity in the home, second mortgage holders are starting to pay attention to all of those loans that they haven’t received payments on since the loan was discharged through the bankruptcy.  Bankruptcy law prevents the lender from coming after you for payments, but they are 100% within their rights to start foreclosure proceedings and take your home from you.

How to Stop a “Second Mortgage” Zombie

If you have a second mortgage Zombie chasing after you, you don’t have a lot of time to react.  Hopefully you are reading this, realize that you may be in this situation, and have the ability to be proactive and stop the Zombie in it’s tracks before it comes after you.

There are essentially only three ways to stop a “second mortgage” Zombie from taking your home:

1. Pay the second mortgage off in full 

This obviously isn’t an ideal situation.  The biggest problem here is that you would not be able to refinance the home to pay off the second mortgage, because technically you have a defaulted mortgage, and a lien against your property.

2. Let the second mortgage foreclose 

If you were planning on leaving the home anyway, this might be your opportunity to finally be done with it.  The worse case scenario is that you can buy a new home 4 years from the discharge of the bankruptcy using a Conventional mortgage as long as you discharged the mortgage debt, and no longer have liens against the property attached to defaulted mortgages.

3. Sell the home, take your money, and run

If you let the Zombie foreclose on your home, they are going to trump up a bunch of attorney fees, penalties and interest and try to consumer as much of your equity as they can.  Remember, Zombies are ruthless!  Knowing what you know now, you can be proactive and sell the home.

This option will put more of your equity in your pocket, and give you control over the timeline.  Similar to option #2, Conventional financing will allow you to buy 4 years from the discharge of the bankruptcy as long as you discharged the mortgage debt, and no longer have liens against the property attached to defaulted mortgages.

By far this is the best option of the three.

The Lesser of All Evils

If you are in this situation currently, I’m sure you’re horrified.  Just when you thought it was over, and you are safe, the ugly reality of the situation manifests itself in a completely unexpected way, putting you right back to where you were in the beginning of this whole mess.

While it may seem like a stretch, there is good news here.  The good news is that by knowing how to deal with this problem, you have an opportunity to get in front of it.  Ignoring is is only going to make things worse.  The longer you live in the home, the more equity you are going to earn, and the hungrier the Zombie gets.

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The guidelines for buying a new home after a financial hardship can offer you options for getting back on your feet, without too much trouble in most cases.

As I’ve mentioned above, Conventional financing will allow you to buy 4 years from the discharge of the bankruptcy as long as you discharged the mortgage debt, and no longer have liens against the property attached to defaulted mortgages.  FHA and VA loans will require a minimum waiting period from the date of the foreclosure, short sale or deed in lieu of foreclosure.

NOTE: CLICK HERE for more information on waiting periods before buying after a financial hardship

If you have questions or comments, please ask below.  I will answer all questions in a timely manner!

About the Author

Scott Schang

A 20+ year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues and making sense of complicated real estate and mortgage topics on this website since 2007

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  • Mellowknee says:

    We had an 80/20 loan with Country Wide in 2006. Bank of America aquired it. We did a home modification (finally) in 2012. We were told that it modified both loans. When I received statements from Carrington Mortgage I was told that they would eventually go away as things were straightened up with the loan. I have called numerous times to BofA over the years and have gotten different answers as to whether this loan exists. Today I was told it did and to contact Carrington because we were looking at refinancing. I know the second was considered an unsecure loan when we originally bought the house. What does that mean? Can they foreclosure or just put a lien on the house? The second was originally for 30,000 and now they say we owe 65,000 at Carrington Mortgage. Funny thing is we just took out a home equity loan to remodel the house. One company found the lien and backed out and another company didn’t find one and gave us the loan. I’m so confused and don’t know how to resolve this. I would be happy to start payments on 30,000 but not 65,000. Help!

    • Scott Schang says:

      First and foremost, you should be able to do a title search to determine what liens are against your property. Your loan officer can do this. You may also be able to contact a title company and ask for a chain of title for your address. If the lien exists, you are subject to the terms of the lien holder. It doesn’t make sense that your second mortgage on an 80/20 would be unsecured. It would make sense that it would be non-recourse, but unsecured does not sound accurate. An unsecured loan is a personal loan that is not tied to any collateral. All mortgages are collateralized by the property.

      Did you file bankruptcy by any chance while you were having challenges prior to the modification in 2012? If so, that changes things and opens up a lot more opportunities for refinancing options.

      There are a lot of moving parts here, and there are still many questions that I have that could influence any advice I might give.

      If you would like, you can email me at scott@findmywayhome.com, and let me know what State you live in. I can definitely point you in the right direction and make sure you don’t have any surprises in the future.

      I hope this helps?

      • Mellowknee says:

        Do you want to hear something crazy? I just got in the mail a “Release of Deed of Trust” out of nowhere!! It still had Countrywide’s name on it. I couldn’t believe it. I thought Carrington owned it, but I have heard that they are just a “mortgage serving” company. I’m not going to complain. I called the county and it is as real as the nose on my face. Why would they do that all of a sudden after all these years, I wonder. Isn’t Countrywide defunct? IDK. We are on cloud 9 at the moment. I’m still shaking my head in disbelief. Thank you for your response to my questions.

  • Jojo says:

    What does it mean ” substitution of trustee and full reconveyance” it was filed by Orion financial Group”

    I rec a copy of the above form stating that ” whereas the undersigned desires to substitute a new trustee under said deed of trust. “Now and therefore the undersigned hereby substitutes ORION FINANCIAL GROUP, AS trustee under said DEED OF TRUST, and as substitute trustee DOES HEREBY RECONVEY in the person or persons legally entitled thereto without warranty, all of estate, title, and interest acquired by Trustee under said DEED OF TRUST. I contacted my mortgage company and I was told that my 2nd loan lien was paid off and release and no action is required. But not sure what does it means substitute? and I don’t know who is “ORION FINANCIAL GROUP”. recorded under MERS,as beneficiary,as nominee for banco popular north america its successors and assigns.
    This is 2nd loan that has been stagnant since 2008

    • Scott Schang says:

      Hi Joann,

      It sounds to me like your servicer sold your non-performing mortgage as part of a larger portfolio of defaulted debt. This company is likely an investor that will try to monetize these defaulted notes.

      Did you file bankruptcy during this period? Unfortunately, your second lien holder can foreclose on your home. Your only option is going to be to either negotiate a pay-off or reinstatement of the second mortgage and/or refinance the first mortgage to pay off the second mortgage.

      This is definitely something that you want to get in front of. I already replied to your email, so hopefully, we will talk soon.

      Let me know about the bankruptcy, and let’s go from there. You have options!

      What State are you in?