California Credit Union League Asks Judge to Suspend State’s Zombie Mortgage Law 

Bonta countered that the constitutional claims are based on a range of exaggerations and mischaracterizations. 

California’s zombie mortgage provision applies to current and future second mortgages on all residential properties, including single family homes, apartment buildings and mixed-use units. It also included consumer and business loans, including home equity lines of credit.  

The “zombie” term refers to second mortgages that “came back to life” after years of inactivity, when homeowners suddenly receive collection notices or foreclosure threats for debts they believed were forgiven, modified or discharged. 

These loans resurfaced following the 2007–08 financial crisis, when home values plunged and millions struggled to pay mortgages. Some second mortgage lenders charged off loans as uncollectible, ceased communications with homeowners and sold the loans to debt buyers, often without notifying borrowers, according to the CFPB. As a result, many borrowers mistakenly believed their second mortgages were resolved.  

A Bloomberg News investigation published last fall reported debt collectors are demanding repayment with back interest and, in some cases, threatening foreclosure. The report estimated that tens of thousands of such loans have been reassigned to debt collectors over the past decade, with hundreds of thousands more potentially at risk. 

The coalition’s motion for a preliminary injunction, if granted by the court, would temporarily suspend the zombie second mortgage law until the lawsuit is resolved.  

They argued the state’s law fundamentally rewrites the rights and remedies governing every deed and trust recorded in the Golden State. 

“Section 2924.13 imposes sweeping retroactive restrictions on the ability of junior lienholders to exercise their contractual foreclosure rights. It requires that, before exercising or threatening to exercise the power of sale clause in junior deeds of trust, certifications must be recorded confirming that no 'unlawful practices' associated with so-called 'zombie mortgages' occurred at any point in the loan’s history,” the coalition’s lawsuit stated. “This obligation extends to actions taken by prior servicers decades ago, as well as conduct that federal law expressly permits or even mandates. The consequences of these now declared ‘unlawful practices’ are immediate and sweeping: The junior lienholder loses its rights under the deed of trust and its ability to foreclose to recover on its unpaid debt. In short, Section 2924.13 retroactively impairs settled contractual rights and arbitrarily singles out subordinate mortgage lenders for punitive treatment that no other similarly situated creditor faces.” 

Bonta’s legal filing disputed this characterization. 

“By its plain language, the statute does not bar foreclosures if one of the ‘unlawful practices’ has occurred; rather, it permits borrowers to temporarily halt the nonjudicial foreclosure process and seek judicial review if they assert there was an unlawful practice,” Bonta stated. “Nor is a judge required to limit the foreclosing party’s relief; instead, the statute permits the court to use its traditional equitable powers to determine what, if any, limitations on the sought foreclosure are appropriate.” 

Bonta said nonjudicial foreclosure would only be barred if the borrower decides to petition a court that would decide whether servicer’s violations were severe enough to warrant barring foreclosure. 

“In sum, the statute only restricts, not eliminates, nonjudicial foreclosures — which is considerably more lax than the rest of the country, as approximately half of U.S. states do not permit nonjudicial foreclosures at all,” Bonta argued. 

READ MORE: Preliminary Injunction Motion, California’s Motion to Dismiss. 

Peter Strozniak can be reached at peter.strozniak@arc-network.com.