The Dangers of Zombie Mortgages: Are You at Risk?

Welcome to today’s blog post, which focuses on a topic that keeps coming up, and that is the frightening zombie mortgage. While you might be thinking of The Walking Dead, where zombies bust through the window and attack everyone, it might be more sinister than that. At least financially, it could result in foreclosure, and ultimately, bankruptcy.

I consider the term zombie mortgage misleading. It makes it seem like something has come out of nowhere for no reason, but it’s mortgages that have been dormant for a while. Let’s discuss this issue.

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Key Points

• A zombie mortgage is a mortgage that has been dormant and suddenly becomes active again. Financially, it can be devastating.
• These mortgages date back to the 2008 mortgage and foreclosure crisis, when many homeowners took out second mortgages and later stopped paying them.
• Underwater mortgages were common during this time when the home’s value was less than the value of the property.
• With the equity in homes increasing, lenders are now taking steps to collect on missed payments.
• If Chapter 7 or Chapter 13 bankruptcy was filed during this time, this can further complicate matters.

What is a Zombie Mortgage?

I wanted to elaborate on what a zombie mortgage is because it’s a common term in financial blogs and discussions. Essentially, a zombie mortgage is a mortgage that has been dormant and suddenly becomes active again. The lender has made no efforts to collect payment, sometimes for years. In my blogs, I have referred numerous times to the financial consequences of the mortgage crisis of 2008, and this is just an extension of that.

During the mortgage and foreclosure crisis of 2008, many people took out second mortgages on their properties. The problem with these second mortgages was that people couldn’t afford to pay them anymore and stopped making payments. Also, this is when we learned of the term “underwater mortgages” because the combined mortgage balance exceeded the value of the homes. I was the perfect example. When my house’s value was cut by more than half, I felt the house became a liability versus an asset, so I walked away.

With underwater mortgages, suppose your property was worth $225,000, and you had a first mortgage of $200,000; you might have taken out a second mortgage of $25,000, maxing out your equity. Over time, as you make payments, your equity builds up. But your mortgage is now underwater if the market crashes and your house’s value drops significantly. This is how zombie mortgages come into play.

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In some places, the value of homes dropped dramatically. For instance, in Naples, FL, values dropped by 70-80%, and it was the same in certain areas of California. In Miami, where I’m from, values dropped by at least 50%.

Imagine your house’s value is cut in half, and to cut corners financially, you stop making payments on the second mortgage. Without any equity, the lender doesn’t move forward with foreclosure because there’s no money to be made. There wouldn’t be sufficient equity to pay off the first mortgage, so the second mortgage lender doesn’t move forward with foreclosure.

If the second mortgage lender pursues a foreclosure, they would be liable to pay off the first mortgage. They won’t take money out of their pocket for this as it makes no sense financially.

• The Confusion with Mortgages and Bankruptcy

So, second mortgages often sit there, and now that there’s some equity building up, they’re knocking on your door saying, “Hey, we’re here to collect.” That’s why I said it “woke up.” If you’re in this situation, consult a bankruptcy attorney because the lender will seek arrears on all the missing payments, forcing you into Chapter 13 bankruptcy.

This becomes more complicated if a Chapter 7 bankruptcy was previously filed, as you can only file every eight years. If you filed three years ago, you might have a problem now. You could still file Chapter 13 bankruptcy as an option.

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• Bankruptcy
• Your Wallet

Please note that the information on this site does not constitute legal advice and should be considered for informational purposes only.

Updated on May 8, 2025.