It’s the stuff of nightmares.  You think you have cleared all of the debt on your home when it goes into foreclosure, only for that debt to crawl up years later and attack you.

Junior Liens

Generally, when a bank or other creditor forecloses on a house pursuant to a first mortgage, all “junior liens” are extinguished.  Junior liens include second mortgage liens and junior judgment liens.  Home equity loans and home equity lines of credit are common forms of second mortgages and hence the basis of junior liens.  Such has been the law in Pennsylvania for almost a century.[1]

Sheriff’s Sale

A sheriff’s sale pursuant to a foreclosure will remove all the liens from the property’s title.  However, the second mortgage debt remains, even though it is no longer attached to the foreclosed property – i.e., the debt has just become unsecured. 

Second Mortgage

The borrower-former owner may not realize that this unsecured debt still exists and may stop paying on the second mortgage.  This former resident is not evil – he just did not know the law.

Accordingly, if the second mortgage lender did not receive enough money from the first mortgage lender’s foreclosure to satisfy the second mortgage debt and if the borrower stopped making payments on the second mortgage loan, the second mortgage lender has the right to sue the borrower for the difference.  In one notable case in Colorado, even where the second mortgage lender was also the buyer of the property at the sheriff’s sale, that purchase still did not extinguish the debt owed by the former owner on the second mortgage. United Bank of Lakewood Nat. Ass’n v. One Center Joint Venture, 773 P.2d 637 (Colo. App. 1989).

For example, say a landowner, Shaun, owes $100,000 on a first mortgage and $100,000 on a second mortgage, and the first mortgage files for foreclosure, which ultimately results in a sheriff’s sale of the property.  The winning bid at the sheriff’s sale is $150,000.  The first mortgage lender accepts $100,000, then the remaining $50,000 is distributed to the second mortgage lender – but $50,000 still remains on that second mortgage.  Nevertheless, Shaun stops making payments on the second mortgage, thinking that the foreclosure and sheriff’s sale has cleared all of the debt that he owed on the property (or for any other reason).  The second mortgage lender now has the right to sue Shaun for the difference – the remaining $50,000 plus any other fees and interest that may have accrued.

It also does not matter if the first and second mortgages were from the same lender.  Returning to the above example, even if The Magic Island Bank was the lender of both the $100,000 first mortgage and the $ 100,000 second mortgage – meaning that it pocketed the full $150,000 sales price from the sheriff’s sale – it still has the right to go after Shaun for the surviving second mortgage debt.

Zombie Mortgages

Additionally, the second mortgage lender does not have to pursue collection on this outstanding debt immediately.  Debt that the former owner thought was long dead and buried can come rising up years later – which is why these debts have become colloquially known as “zombie mortgages.”

Again, in our example, say The Magic Island Bank forgot about the $50,000 debt still owed by the former owner.  Then, 19 years and 28 days later, The Magic Island Bank is hoping to merge with Romero Bank, which has its accountants look at The Magic Island Bank’s books, only to discover that Shaun still owes $50,000 – plus all the interest and fees that have accrued in the intervening years.  It’s close to midnight on the 19th year and 364th day after Shaun missed his last payment on his second mortgage when Shaun then receives notice from The Magic Island Bank that he now owes more than the original $100,000 principal. 

How could this be happening to Shaun almost 20 years later? 

For most debt collection in Pennsylvania, the statute of limitations for a lender to collect is four (4) years.  However, mortgages are almost always signed under seal.  Simply having the word “seal” next to a signature is enough.  For documents signed under seal, the statute of limitations is extended to twenty (20) years in Pennsylvania. 42 Pa. C.S. § 5529(b)(1).

This practice of “resurrecting” zombie second mortgages is increasingly common.  Although the term “zombie mortgage” has been around for about two decades, there has been an upswing in the past two years of lenders reviving undead second mortgages.

Depending upon the circumstances of the case, there are several defenses that can be raised to zombie mortgage collection efforts.  For instance, as with any mortgage collection effort, the entity attempting to collect on the debt has to be able to prove that it has the authority to enforce the note.  Again, returning to the example of Shaun, if The Magic Island Bank and Romero Bank merge, the newly created entity will have to provide some proof that the debt under Shaun’s note was assigned to it.

[1] See, e.g., Moore v. Schell, 99 Pa. Super. 81 (1930); Albert J. Grosser Co. v. Rosen, 259 A.2d 679, 681 (Pa. 1969).

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