A brand new invoice signed into legislation this month is about to guard some New England owners from foreclosure on years-old zombie seconds many probably had forgotten existed.
Connecticut Gov. Ned Lamont signed new laws into legislation earlier this month that establishes protections for debtors with secondary piggyback or 80/20 mortgages whose final funds have been recorded over 10 years in the past. The invoice handed on a bipartisan foundation in each the state’s Senate and House of Representatives in May.
“This invoice protects our owners from foreclosure threats primarily based on debt that is been dormant for greater than a decade,” stated co-sponsor Sen. Pat Billie Miller after it was accredited within the higher chamber.
Why zombie mortgages are making information
Such secondary liens have been a typical providing previous to the Great Recession. Using the choice, debtors typically took out a major mortgage to cowl 80% of the worth, alongside a secondary mortgage for the remaining 20%. The technique allowed many patrons to keep away from buying mortgage insurance coverage or lowered their down fee.
Plunging dwelling values through the monetary disaster drove a lot of these mortgages underwater, ultimately main many loans to be modified or forgiven. Homeowners assumed on the time their second liens fell below the identical phrases. notably when servicers didn’t trouble to gather when collateralized properties have been price lower than the unique mortgage values.
But the surge in housing costs to file ranges over the previous a number of years led to new-found curiosity on the a part of banks and servicers in properties with such dormant secondary liens, which have been dubbed “zombie mortgages.”
In some instances, the loans have been bought a number of instances since origination to servicing events unfamiliar to the house owner.
“No one making dependable funds on their major mortgage ought to face foreclosure as a result of somebody made an opportunistic determination to resurrect a secondary mortgage, years after deciding that assortment wasn’t definitely worth the effort when property values plummeted within the aftermath of the 2008 monetary disaster,” added Miller, who additionally serves as chair of the Connecticut Senate banking committee.
The invoice handed by votes of 35-1 within the Senate and 140-6 within the House. The legislation goes into impact on Jan. 1, 2026.
Zombies see regulatory scrutiny elsewhere
Connecticut’s actions come as judges and state regulators sharpen their deal with servicer makes an attempt to gather on such loans. Newrez subsidiary Shellpoint Servicing at present faces a minimum of two zombie-second associated lawsuits, with owners claiming they acquired assortment notifications for excellent charges and curiosity after not seeing any correspondence relating to the loans for years.
In 2024, officers in neighboring Massachusetts additionally fined Franklin Credit Management Corp. $300,000 and prohibited it from working within the state after its makes an attempt to gather on zombie mortgages. The enforcement motion additionally barred the corporate from additional assortment and switch or sale of the liens, successfully eliminating greater than $10 million in debt belonging to Massachusetts residents.
Along with Connecticut, different states that provide some type of protection to debtors with secondary liens embrace Virginia and Ohio. Massachusetts and California at present have payments pending.
