Nurse shocked to find family home of 17 years sold behind her back – due to mysterious loophole that could affect vast numbers of Americans
So-called ‘zombie mortgages’ are coming back to life in the US as house prices rise, experts warn.
In the run-up to the housing crisis in 2008, millions of Americans took out a second mortgage on their home, which they were no longer able to pay off during the crisis.
Lenders did not pursue foreclosure because the housing price crash made it unlikely they would get the money back. Homeowners often assumed the debt had been forgiven.
But these dormant loans are now coming back to life – hence the term ‘zombie mortgage’.
The forgotten mortgages had been bought up for pennies on the dollar by debt collectors who had patiently waited for home prices to rise to record levels – to make it worth chasing after the money.
Now that they have retroactively imposed the fees and interest, they come to collect the money, and this often means foreclosing on the homes to capture a large portion of the increase in value.
Karen McDonough, of Quincy, Massachusetts, believed her second mortgage had been charged off. That was until she came across a foreclosure auction in her front yard.
A ‘zombie mortgage’ is a loan that a homeowner forgot about, or was told was written off by a lender – only to resurface years later
Karen McDonough of Massachusetts believed her second mortgage had been written off
McDonough, a nurse, had owned the home for 17 years, she said NPRas part of a recent study into zombie mortgages.
She had raised two children in the house and paid her mortgage monthly.
When she bought the property in 2005, she had taken out an 80/20 loan, which meant she had two mortgages: one for 80 percent of the house’s value and another for the remaining 20 percent.
But two years later, her first mortgage was adjusted and the monthly payments were suddenly $700 a month higher.
A year later, McDonough was able to have her loan modified to lower the interest rate and make it affordable again.
She said her mortgage company told her that as part of the modification, the second mortgage had been forgiven.
She stopped receiving statements on the second mortgage and assumed it was dead.
Fast forward to 2022, when a group of men gathered in her driveway for a foreclosure auction.
McDonough had received phone calls demanding money but thought it was a scam.
She claims her first mortgage company also told her to ignore the calls because they were most likely fraud.
The men on the lawn said to her, “This is an execution. You’re going to lose this house,” McDonough told NPR.
It turned out that her second mortgage had been sold to a company within a group of 600 others, instead of being written off as she had thought.
A few months after the auction, she received an orange eviction notice on her front door.
McDonough still lives in her home and has filed a lawsuit alleging that the company that bought her second mortgage then used unfair and deceptive practices to foreclose on her home.
“I feel like what happened is terrible,” McDonough told the outlet.
‘But I am still hopeful that I will continue to live in my house. I’m really hopeful that I’ll win this case.’
An important detail that can be used against collection agencies is that in many cases they add years of interest and late fees to the amount the homeowner initially borrowed.
Although companies are allowed to do this under federal regulations, they must send monthly statements to the homeowner detailing the additional costs.
In many cases, like McDonough’s, homeowners received no information about the loans for years.
And she is certainly not alone.
In New York, NPR found at least 10,000 old second mortgages that had seen foreclosure activity in the past two years. The loans originated during the 2004 to 2008 housing bubble.
Researchers also found at least 500 old second mortgages in Maryland where steps toward foreclosure had been made.
“The numbers are very frightening to me,” Andrea Bopp Stark, an attorney at the National Consumer Law Center, told the newspaper.
The problem is feared to be widespread across America.
“If you look at the number of bankruptcy filings, or at least the attempts to collect on this zombie debt, you see the numbers rising dramatically into the thousands, if not more, in individual jurisdictions,” David Weber, a professor at Creighton University School of Law, told it The New York Times.
“That’s a lot of activity.”
He attributed the increased attention to zombie mortgages to the increase in house prices.
Rising property values build equity in a property, allowing a secondary mortgage holder to make money even after the first mortgage holder is paid, Weber said.
After the 2008 housing crisis, millions of Americans took out a second mortgage on their homes, which debt collectors are now taking advantage of
This is because when a home with two mortgages is foreclosed on, the loans are waiting to be repaid.
When it is sold, the first mortgage takes out the money needed to cover the debt, and what’s left goes to the second mortgage.
When prices collapsed in 2008, second mortgages seemed worthless in many cases, NPR reports.
But now that prices have risen, if a house is foreclosed on, there is enough money to pay off both mortgages.
In McDonough’s case, the value of her home had skyrocketed from $365,000 in 2005 to more than $600,000.