A federal judge in Sacramento expressed skepticism during a February 2026 hearing about a lawsuit challenging California's controversial "zombie mortgage" law. U.S. District Judge Dale A. Drozd questioned whether California's attorney general is a proper defendant in the case brought by a coalition including the California Credit Union League, California Mortgage Association, and other lenders. The lawsuit seeks to block Assembly Bill 130, which Governor Gavin Newsom signed into law in June 2025 to protect homeowners from unexpected foreclosure threats on dormant second mortgages. The law requires mortgage servicers to certify they have not engaged in unlawful practices—such as failing to communicate with borrowers for three years—before pursuing foreclosure on subordinate liens.

The challenge to California's law comes as the Federal Housing Finance Agency has documented significant risks associated with second mortgages in its mortgage market oversight. According to FHFA's Working Paper 14-3 examining the relationship between second liens and first mortgage outcomes from 1996-2010, piggyback second liens substantially increased mortgage default rates during the housing boom. The research found that by the mid-2000s, second liens became associated with materially worse performance for underlying first mortgages, contributing to the financial crisis. More recently, FHFA conditionally approved Freddie Mac's pilot program in June 2024 to purchase limited closed-end second mortgages, with strict safeguards including a $2.5 billion volume cap and maximum loan amounts of $78,277.

FHFA's analysis of second lien markets provides crucial context for understanding California's regulatory approach to zombie mortgages. The agency's research revealed that second lien holders could historically "hold up" loan modifications and mortgage refinances beneficial to first mortgage holders, creating systemic risks. FHFA Director Sandra L. Thompson emphasized that as of December 2023, over 95 percent of Enterprise-backed single-family mortgages had rates below current market rates, with median California home prices having doubled in less than a decade. This dramatic appreciation has incentivized debt buyers to resurrect dormant second mortgages from the 2007-08 financial crisis, when lenders often charged off loans as uncollectible and ceased communications with borrowers without notification.

The FHFA's regulatory framework emphasizes the importance of proper mortgage servicing standards and borrower protection, principles that align with California's legislative intent. According to FHFA's foreclosure prevention guidelines, servicers must conduct formal reviews before referring loans for foreclosure and maintain consistent borrower communication. The agency's oversight of Fannie Mae and Freddie Mac includes requirements that servicers contact borrowers as soon as they become delinquent and focus on remediation. As the California lawsuit proceeds, FHFA's extensive research on second lien risks and its emphasis on servicer accountability provide federal-level validation for state efforts to regulate zombie mortgages, though the constitutional questions about retroactive application and federal preemption remain unresolved pending Judge Drozd's eventual ruling.