‘Zombie’ Second Mortgages Spur New Battles in State Capitols

Core Insights - The issue of zombie mortgages is gaining attention as public-interest attorneys file lawsuits against unlawful debt collection practices, particularly following the weakening of the Consumer Financial Protection Bureau (CFPB) under the Trump administration [1][4]. Group 1: Legislative and Regulatory Context - Nearly all states have statutes of limitations that prevent residential foreclosures after a certain period, which varies from a few years to over a decade [2]. - In Maryland, a proposed bill aimed to protect homeowners from unfair debt collection practices related to zombie loans, but faced significant opposition from lobbyists and ultimately stalled in the Senate [6][24]. - Virginia passed a law in 2024 requiring debt collectors to verify the accuracy of back interest owed before foreclosing on old second mortgages, which reportedly led to a halt in zombie foreclosures in the state [20]. Group 2: Industry Response and Challenges - The debt-collection industry argues that new consumer protections for zombie mortgages could disrupt the secondary mortgage market, claiming that abuses are rare [4][10]. - A trade group representing the debt-collection industry advocates for a single federal standard for regulation, arguing that the current state-by-state approach is inefficient and costly for consumers [11]. - Consumer advocates emphasize the need for stronger protections against debt collectors who exploit gaps in state laws, as evidenced by numerous lawsuits [12][19]. Group 3: Consumer Impact and Awareness - A Bloomberg investigation revealed that over 600,000 second mortgages from before the 2008 financial crisis remain outstanding, with debt collectors purchasing these for low prices and demanding payment from homeowners [3]. - Many consumers are unaware of the statutes of limitations on their debts, leading to confusion and potential financial distress when approached by debt collectors [2]. - The lack of federal enforcement of consumer protection laws leaves borrowers vulnerable to exploitation by debt collectors [12].