Latest Scam: Zombie Mortgages Come Back To Life And Homes Are Foreclosed On
In 2005, Karen McDonough saw a charming two-bedroom home in Quincy, Massachusetts, that she wanted to buy. But she didn’t have a big down payment for the yellow, cottage-size house.
However, a mortgage company made it possible for her to purchase the $365,000 home—without a down payment—by offering her two mortgages. The first mortgage loan for $292,000 covered 80 percent of the value of the house, and the second mortgage for $73,000 covered the remaining 20 percent.
“It was the easiest thing I’ve ever applied for,” McDonough, a registered nurse, told NPR. “I just filled out paperwork and submitted it and I was approved.”
Two years later, McDonough’s first mortgage adjusted, causing her payments to skyrocket $700 a month higher, which she could not afford. So, in 2008, she got her first mortgage modified to lower the interest rate and make it affordable again. McDonough said the mortgage company told her not to worry about the second mortgage because it was written off and forgiven.
“And I just didn’t question any of it ’cause I was so grateful that the loan was modified,” McDonough told NPR.
For the next ten years, McDonough had stopped getting statements about her second mortgage. However, in 2020, McDonough said she received a letter from First American National, a company she had never heard of before, claiming she owed $77,000 on the second mortgage. McDonough said the company kept calling and threatening to foreclose on her house if she didn’t pay.
One morning in 2022, McDonough said she was having tea at her dining room table when she saw about 20 cars converging on her street, some even parked in front of her house.
“I just had this feeling like something really bad had happened… like maybe somebody in the neighborhood died,” McDonough recalled to NPR.
The drivers got out of their vehicles and milled around on her lawn. So, McDonough went outside to see what was going on. She asked a man who had a clipboard and seemed to be in charge, what was happening. He told her, “We’re selling your house.”
McDonough was shocked when she found out that it wasn’t one of her neighbors who had died; her second mortgage—the one she thought was dead—had come back to life.
McDonough is among millions of Americans whose second mortgages—that they believed were forgiven or satisfied a long time ago—have come back to attack them, like a zombie in a science fiction story. This is why these loans are referred to as “zombie mortgages.”
How Zombie Mortgages Awakened
Before the Great Recession of 2008, many mortgage lenders relied on predatory practices to lock homebuyers into “piggyback” mortgages, which involve taking out two mortgage loans for the same property, according to the Consumer Financial Protection Bureau (CFPB), an independent bureau within the Federal Reserve System. The primary mortgage would cover 80 percent of the purchase price of the property, and the second mortgage would cover the remaining 20 percent.
After the 2008 financial crisis caused a major downturn in economic activity, borrowers had a hard time making both mortgage payments. The borrower may have been current on the first mortgage payment but defaulted on the second mortgage. When this occurred, the mortgage holder could sometimes start foreclosure, according to the CFPB.
Some second mortgage holders charged off their defaulted loans as uncollectible and stopped communicating with borrowers, while others sold the loans to debt buyers without telling the borrower.
Some borrowers who, for years, had not received notices or periodic statements, thought their second mortgages had been modified along with the first mortgage, discharged in bankruptcy, or forgiven.
Now, years later, as borrowers have paid down their first mortgages, they are hearing from companies wanting to collect the long-dormant second mortgage. What’s more, holders of the second mortgages—and their debt collectors—are threatening foreclosure and other collection actions. Some of these debt collectors demand the outstanding balance on the second mortgage, plus fees and interest, and some threaten to foreclose if the borrower does not or cannot pay.
Second mortgages have a second life now because home values have increased in some states. So, a foreclosed home with a high market value can be purchased for pennies on the dollar. For example, McDonough’s home is now worth $600,000, but it was purchased by First American National at an auction for $178,500, according to NPR.
NPR’s Zombie Mortgage Investigation
The resurrection of zombie mortgages and the high number of foreclosures prompted NPR to investigate the issue. NPR counted a mortgage as a zombie mortgage if it defaulted more than a decade ago, and a Notice of Intent to Foreclose was filed between January 2019 and July 2023.
NPR examined foreclosure data across several states, where records were available, and found at least 10,000 old second mortgages that foreclosure activity had been initiated on in just the past two years. In Maryland, NPR found that a company has taken the first step toward foreclosure against 500 zombie mortgages that had been in default and unpaid for more than a decade.
Investors like David Gordon, co-founder of ARC Private Equity in Miami Beach, Florida, are buying zombie mortgages and sending letters through a debt collection firm asking for money and sometimes threatening foreclosure.
Gordon told NPR that he is not out to take anybody’s home. In fact, he said he is reasonable, follows the rules, and is willing to negotiate with homeowners by lowering the amount they owe, in some cases. However, Gordon said that investors deserve to make their money back.
“Nothing is free in this world, and if you signed up for a loan, you know what you signed up for,” Gordon told NPR. “It is what it is.”
Homeowners Are Filing Lawsuits
Kristi Kelly, who has a consumer law firm in Fairfax, Virginia, is fighting zombie mortgages on behalf of homeowners. Kelly told NPR that many of the companies are violating Regulation Z, which is part of the Truth in Lending Act that requires companies to send monthly statements if there is interest assessed on a mortgage.
Kelly resolved a class action case where she was able to get the names of nearly 300 homeowners from one company and help them all. Fredis Hernández, a Stafford, Virginia, resident, was one of the homeowners involved in the class action. Hernández told NPR that the company was moving to foreclose on his home—where three generations lived. Hernández said he was “afraid of losing the only thing I’ve managed to achieve at 63 years old.”
Kelly told NPR that she would like to see state attorneys general and federal regulators, such as the CFPB, do more to enforce existing laws.
Meanwhile, McDonough filed a lawsuit against First American National over the zombie mortgage. While waiting for the outcome, McDonough planted pansies and took care of her yard this spring, even though she doesn’t own the house.
“It’s still my house,” she told NPR. “Like on principle—it’s still my home.”
Source Links:
https://www.npr.org/2024/05/10/1197959049/zombie-second-mortgages-homeowners-foreclosure
https://www.consumerfinance.gov/ask-cfpb/what-is-a-zombie-second-mortgage-en-2133/
