So-called “zombie mortgages” are coming back to life in the United States as home prices rise, experts warn.
In the run-up to the 2008 housing crisis, millions of Americans took out second mortgages on their homes, which they then defaulted on during the crisis.
Lenders did not file for foreclosure because falling home prices made it unlikely they would recover the money. Homeowners often assumed the debt was paid off.
But these dormant loans are coming back to life, hence the term “zombie mortgage.”
The forgotten mortgages had been purchased for pennies on the dollar by debt collectors who have waited patiently for home prices to rise to record highs, making the money worth chasing.
Now, after they’ve added fees and retroactive interest, they come to collect the money, and this often means foreclosing on homes to take a large portion of the increased value.
Karen McDonough, of Quincy, Massachusetts, believed her second mortgage had been paid off. That was until she stumbled upon a foreclosure auction in her front yard.
A ‘zombie mortgage’ is a loan that a homeowner forgot about or was told by a lender had been paid off, only to reappear years later.
McDonough, a registered nurse, had owned the home for 17 years, she said. NPRas part of a recent investigation into zombie mortgages.
She had raised two children at home and paid her mortgage every month.
When he bought the house in 2005, he took out an 80/20 loan, which meant he had two mortgages: one that covered 80 percent of the home’s value and another that covered the remaining 20 percent.
But two years later, her first mortgage adjusted and her monthly payments suddenly increased by $700 a month.
A year later, McDonough was able to modify his loan to lower the interest rate and make it affordable again.
He said his mortgage company told him that, as part of the modification, the second mortgage had been forgiven.
He stopped receiving statements on the second mortgage and assumed it was dead.
Fast forward to 2022, when a group of men gathered in the driveway of their home for a foreclosure auction.
McDonough had been receiving 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 told him: ‘This is a foreclosure. You’re going to lose this house,” McDonough told NPR.
It turned out that his second mortgage had been sold to a company within a batch of 600 others, instead of being paid off as he had thought.
A few months after the auction, an orange eviction notice was posted on his front door.
McDonough still lives in his home and filed a lawsuit alleging that the company that purchased his second mortgage then used unfair and deceptive practices to foreclose on his home.
“I feel like what happened was a terrible thing,” McDonough told the outlet.
‘But I still have high hopes of staying at home. “I very much hope to win this case.”
A key detail that can be used against debt collectors is that in many cases they are adding interest and late fees for a year on top of the amount the homeowner initially borrowed.
While federal regulations allow companies to do this, they must send monthly statements to the homeowner detailing any additional costs.
In many cases, like McDonough’s, homeowners did not receive any information about the loans for years.
And she is not alone at all.
In New York, NPR found at least 10,000 old second mortgages on which foreclosure activity had begun in just the last two years. The loans originated during the subprime housing bubble of 2004 to 2008.
Investigators also found at least 500 older second mortgages in Maryland on which foreclosure actions had been taken.
“The numbers scare me very much,” Andrea Bopp Stark, an attorney at the National Consumer Law Center, told the outlet.
It is feared that the problem will spread throughout the United States.
“If you look at the number of these foreclosures, or at least the attempts to collect this zombie debt, we are starting to see the numbers increase dramatically into the thousands, if not more, in individual jurisdictions.” David Weber, a professor at Creighton University School of Law, said The New York Times.
“That’s a lot of activity.”
He attributed the increased attention paid to zombie mortgages to rising home prices.
Rising property values build equity in the 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 second mortgages on their homes, which debt collectors are now taking advantage of.
This is because when a home is foreclosed on with two mortgages, the loans are waiting to be repaid.
If it is sold, the first mortgage keeps the money necessary to cover the debt and what is left goes to the second mortgage.
When prices collapsed in 2008, second mortgages seemed useless in many cases, NPR reported.
But now that prices have risen, if one house is foreclosed on, there is enough money to pay both mortgages.
In McDonough’s case, the value of his home had skyrocketed from $365,000 in 2005 to more than $600,000.
