‘Zombie debt’: Collections on old loans haunt homeowners
Rose Prophete thought the second mortgage loan on her Brooklyn home was resolved about a decade ago — until she received paperwork claiming she owed more than $130,000.
“I was shocked,” said Prophete, who refinanced her two-family home in 2006, six years after arriving from Haiti. “I don’t even know these people because they never contacted me. They never called me.”
Prophete is part of a wave of homeowners who say they were blindsided by the start of foreclosure actions on their homes over second loans that were taken out more than a decade ago. The trusts and mortgage loan servicers behind the actions say the loans were defaulted on years ago.
Some of those homeowners say they weren’t even aware they had a second mortgage because of confusing loan structures. Others believed their second loans were rolled in with their first mortgage payments or forgiven. Typically, they say they had not received statements on their second loans for years as they paid down their first mortgages.
Now they’re being told the loans weren’t dead after all. Instead, they’re what critics call “zombie debt” — old loans with new collection actions.
While no federal government agency tracks the number of foreclosure actions on second mortgages, attorneys aiding homeowners say they have surged in recent years. The attorneys say many of the loans are owned by purchasers of troubled mortgages and are being pursued now because home values have increased and there’s more equity in them.
“They’ve been holding them, having no communication with the borrowers,” said Andrea Bopp Stark, an attorney with the Boston-based National Consumer Law Center. “And then all of a sudden they’re coming out of the woodwork and are threatening to foreclose because now there is value in the property. They can foreclose on the property and actually get something after the first mortgages are paid off.”
Attorneys for owners of the loans and the companies that service them argue that they are pursuing legitimately owed debt, no matter what the borrower believed. And they say they are acting legally to claim it.
Court actions now can be traced to the tail end of the housing boom earlier this century. Some involve home equity lines of credit. Others stem from “80/20” loans, in which homebuyers could take out a first loan covering about 80% of the purchase price, and a second loan covering the remaining 20%.
Splitting loans allowed borrowers to avoid large down payments. But the second loans could carry interest rates of 9% or more and balloon payments. Consumer advocates say the loans — many originating with since-discredited lenders — included predatory terms and were marketed in communities of color and lower-income neighborhoods.
The surge in people falling behind on mortgage payments after the Great Recession began included homeowners with second loans. They were among the people who took advantage of federal loan modification programs, refinanced or declared bankruptcy to help keep their homes.
In some cases, the first loans were modified but the second ones weren’t.
Some second mortgages at that time were “charged off,” meaning the creditor had stopped seeking payment. That doesn’t mean the loan was forgiven. But that was the impression of many homeowners, some of whom apparently misunderstood the 80/20 loan structure.
Other borrowers say they had difficulty getting answers about their second loans.
Some people facing foreclosure have filed their own lawsuits citing federal requirements related to periodic statements or other consumer protection laws. In Georgia, a woman facing foreclosure claimed in federal court that she never received periodic notices about her second mortgage or notices when it was transferred to new owners, as required by federal law. The case was settled in June under confidential terms, according to court filings.
In New York, Prophete is one of 13 plaintiffs in a federal lawsuit claiming that mortgage debt is being sought beyond New York’s six-year statute of limitations, resulting in violations of federal and state law.