Q: My mother recently passed away. She lived in a condo in Salem, Massachusetts, and diligently paid off her mortgage. However, it turns out that the condo has an outstanding “zombie mortgage” held by the previous owners who failed to disclose it upon sale. This mortgage owner attempted to foreclose on the previous owner's loan. Luckily, my mother had title insurance, which should have caught the problem when it was sold, but it didn't. My sister and I are forced to continue paying the mortgage as we cannot sell the property if the title is not yet secured. What can be done to solve this problem?
A: Unfortunately, this is a thorny issue that may take some time to resolve.
Zombie mortgages are typically second mortgages taken out before the 2008 housing crash. After the crash, many lenders and investors stopped trying to collect on mortgage debt because home values had fallen below the loan amount, leading borrowers to believe the debt was gone. Lenders or investors waited until property values rose and loan interest rates rose, then attempted to collect or foreclose on the properties.
It is unfortunate that this lien was not discovered before your mother foreclosed on her condominium. It appears that no one has done a thorough title search and now the burden is on you.
If mortgage servicing goes dormant and does not attempt to collect on a loan, it may be a violation of federal law. In a case last year, the Massachusetts Attorney General's Office reached a settlement with a mortgage servicer that failed to properly notify second mortgage borrowers that they still owed money, provide them with explanations or take steps to prevent foreclosure.
Additionally, a zombie mortgage bill is pending in Massachusetts that will impose further penalties on servicers who do not comply with the law.
“Hopefully, hiring your own attorney will help you understand the process and what is in your best interest in this situation,” said Andrea Bopp Stark, senior attorney at the National Consumer Law Center. Unfortunately, as you are now discovering, the process can take months or years to resolve.
In such a situation, it's possible that the previous owners paid off the debt but the mortgage was never paid off, said Adam Deutsch, a consumer rights attorney in western Massachusetts. You can look at your mother's HUD-1 statement to see which creditors were paid during the transaction. The title insurance could then cover the costs of applying to pay off the mortgage.