After 9/11, President Bush encouraged Americans to go out and spend money to keep the economy going. One of the results of this, was a housing bubble. This was encouraged not only by the housing and lending industries themselves, but by top levels of government, and by television shows that promoted the undeniable good feeling of homeownership and do it yourself engineering.
One of the features of the housing bubble was the proliferation of second mortgages on relatively new purchases, specifically the home equity line of credit, or other Junior mortgages that allowed homeowners to go out and spend more, leveraging their house to the same or a second lender in the process.
Of course, this came to a screeching halt with the financial crash of 2007, following the failure of Lehman Brothers, the near collapse of General Motors, the implosions of WorldComm and Enron, and the companion collapse in the real estate industry.
No longer could anyone who could fog a mirror get a loan.
Over the years 2007 to 2012, there were some homeowners who were able to refinance or modify their mortgages, which saved them from foreclosure or bankruptcy. However, for many of these homeowners, they didn’t realize that what they had modified or refinanced was the senior mortgage, and not the HELOC, which laid buried in the weeds for years.
But beginning around 2013, holders of the HELOC loans began to spring out of the weeds, and demanded payment or threatened foreclosure. These mortgages, which had laid dormant for years, eventually became known as zombie mortgages, because 1) many homeowners mistakenly believe that modifying the senior mortgage had modified the second, and 2) the holders of the loans had remained silent, and not communicated with the homeowners for years.
The problem of these “springing” or “Zombie” mortgages has continued unabated since the mid-2000 ‘teens. One typical way they come to the attorney’s attention is that the client, blissfully paying his/her/their modified first mortgage, in the first, second, or fifth year after modification, receives a cold, rude letter stating that the property will be placed in default, and on the road to foreclosure, in 60 to 90 days unless the outstanding HELOC is paid off. The client is taken aback, because she/he/they believed that “Everything was modified back in 2010 or 2012 or 2014.” Or, “We thought we had taken care of all the loans.” Or, (even more cynically) “That’s the same lender who has the first mortgage.”
Eventually however, California, has sought to deal with the “zombie” mortgages, expanding protections connection to the Homeowners Bill of Rights.
Specifically, the “Zombie Mortgage” section begins with Civil Code Sec. 2924.13, which entered into effect on July 1, 2025.
The California Credit Union League, in its Summary of California Assembly Bill 130 – Housing, (July 1, 2025), summed up the prohibited conduct under new Civil Code Sec. 2924.13 (b) as follows (the following is presented as part of this commentary on an important public issue):
“Civil Code Sec. 2924.13(b), provides that any one of the following practices alone will be considered an Unlawful practice that could preclude the credit union (or presumably, another lender or servicer) from successfully foreclosing on a second mortgage lien.
“1. The mortgage servicer did not provide the borrower with any written communication regarding the loan secured by the mortgage for at least three years. (Credit unions may not send periodic statements or any other written communication on a second mortgage or home equity lines of credit (HELOC) that has been charged off. This rule also runs afoul of the applicable statute of limitations that allows foreclosure as a remedy well beyond the three year timeframe established here.)
“2. The mortgage servicer failed to provide a transfer of loan servicing notice to the borrower when required to provide that notice by law, including, but not limited to, the federal Real Estate Settlement Procedures Act, as amended (12 U.S.C. Sec. 2601 et seq.), and investor or guarantor requirements.
“3. The mortgage servicer failed to provide a transfer of loan ownership notice to the borrower when required to provide that notice by law, including, but not limited to, the federal Truth in Lending Act, as amended (15 U.S.C. 1601, et seq.), and investor or guarantor requirements.
“4. The mortgage servicer conducted or threatened to conduct a foreclosure sale after providing a form to the borrower indicating that the debt had been written off or discharged, including, but not limited to, an Internal Revenue Service Form 1099. (This raises issues for credit unions when filing 1099-Cs or otherwise communicating in writing about debt that has been discharged, including debt discharged in bankruptcy.)
“5. The mortgage servicer conducted or threatened to conduct a foreclosure sale after the applicable statute of limitations expired.
“6. The mortgage servicer failed to provide a periodic account statement to the borrower when required to provide that statement by law, including, but not limited to, the federal ruth in Lending Act, as amended (15 U.S.C. 1601, et seq.), and investor or guarantor requirements.
(Reg Z allows a lender on a HELOC to stop sending periodic statements to the borrower provided the lender does not continue to charge the borrower for additional interest and/or fees. As such, a credit union that stops sending statements in connection with a second lien HELOC should not be in violation of this subsection if TILA/Reg Z allows the credit union to stop sending statements given the circumstances.)”
Of course, tens of millions of dollars, in cash and real estate, are at stake. Consequently, the lenders and servicers are not taking this medicine lying down (or dead; really?); their lawsuit in federal court in Fresno will be the subject of Part II of “Zombie Loan Apocalypse.”
THIS POST DOES NOT CONSTITUTE LEGAL ADVICE; PLEASE CONSULT AN ATTORNEY
PRESENTED AS COMMENTARY ON AN IMPORTANT PUBLIC ISSUE
