Zombie Mortgages Under the Microscope as Debt Collectors Cash In

U.S. Sen. Elizabeth Warren of Massachusetts has sought documentation related to loans forgiven under a $25 billion national mortgage settlement that targeted foreclosure practices and other mortgage abuses by banks after the 2008 financial crisis.

Some of these loans—known as zombie mortgages—were reportedly sold to debt buyers for pennies on the dollar, despite many homeowners having received tax forms years earlier indicating the debts had been canceled.

"These zombie mortgages arise from second mortgages or HELOCs that homeowners believed were canceled in the wake of the Great Financial Crisis," says Joel Berner, senior economist at Realtor.com®.

"The original lenders stopped collecting payment on them, but when they are sold to debt purchasers, they 'come back to life' and homeowners are faced with bills they didn't expect or even the threat of foreclosure.

"This adds uncertainty to the prospect of homeownership, which is already an affordability challenge for many."

Collection agencies reportedly broke consumer protection laws

Some collection agencies regularly broke consumer protection laws by charging years of back interest on these zombie mortgages for periods when no statements had been issued, according to a report by Bloomberg.

In some instances, homeowners were foreclosed on despite having tax documents showing their loans had been canceled years before.

"I am concerned that banks may have received credit for extinguishing second mortgages in the settlement, when in fact they sold those loans to debt collectors," Warren wrote in her letter to Joseph A. Smith Jr., independent monitor of the 2012 settlement between the Department of Justice, 49 state attorneys general, and the largest mortgage servicers.

Bloomberg examined more than 5.5 million piggyback mortgages issued between 2002 and 2008, and estimated that 600,000 of these old second mortgages remain.

Some financial institutions may have sold debts that were uncollectible, according to records reviewed by Bloomberg.

"A debt buyer may purchase a portfolio for pennies, then send payoff letters that inflate principal with fees," Chad D. Cummings of Cummings & Cummings Law in Florida tells Realtor.com. "A $15,000 old second mortgage can become a $45,000 demand."

Warren stands up for homeowners

Warren is concerned about these zombie mortgages, and she's demanding answers.

"There have been numerous cases of homeowners who had stopped receiving statements on their second mortgage, received tax documents saying their second mortgage was cancelled, or had the loans removed from their credit reports, and then learned that the second mortgage was still active," the Democratic senator wrote in her letter to Smith.

"Companies purchased millions of dollars of these second mortgages—and waited to collect until home prices rose," Warren continued. "Now, Americans who thought they were doing everything right learned, in many cases many years later, that debt collectors seeking to exploit the increase in their home valuations were going to foreclose on their homes."

Warren has requested that Smith provide any records related to the second mortgages that were extinguished under the terms of the National Mortgage Settlement, as well as any communications between Smith and the banks related to the extinguishment of second mortgages by Jan. 7, 2026.

"Sen. Warren’s proposal is interesting in that the mortgage enforcement historically belongs to state law, not federal law," says Cummings. "States control recording systems, foreclosure procedures, statutes of limitation, and lien priority. Federal law touches lending disclosures and debt collection, but it rarely rewrites who owns a lien or how title clears."

Some states are already taking action

California, Connecticut, and Virginia have recently passed laws to address abuses tied to zombie mortgages.

A Massachusetts bill is under review by the state’s judiciary committee, and Maryland lawmakers plan to introduce similar legislation this year.

"The bottom line is that zombie mortgages are a huge issue, and will get even bigger in 2026 and beyond," says Cummings. "The only question is whether it makes sense to enforce this federally or at the state level."