“Zombie debt” rises to bite homeowners of old loans with new collection efforts

“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 among a wave of homeowners who say they were caught off guard by the start of foreclosures on their homes over second loans taken out more than a decade ago. The trusts and mortgage loan servicers behind the lawsuits say the loans defaulted years ago.

Some of these homeowners say they didn’t even know they had a second mortgage due to confusing loan structures. Others believed their second loans were rolled in or forgiven with their first mortgage payments. Typically, they say they haven’t received explanations about their second loans for years when they paid off their first mortgages.

Now they’re being told that the loans weren’t dead after all. Instead, they’re what critics call “zombie debt” — old loans with new collection schemes.

While no federal agency tracks the number of foreclosures on second mortgages, attorneys who help homeowners say they have risen sharply in recent years. Lawyers say many of the loans are owned by buyers of distressed mortgages and are now being pursued because property values ​​have risen and there is more equity in them.

“They withheld them and had 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 come out of the woods and threaten foreclosure because the property has value now. You can foreclose on the property and actually get something after the first mortgages are paid off.”

Lawyers for the owners of the loans and the companies that service them argue that they pursue legitimate debts owed, regardless of what the borrower believes. And they say they are acting legally to claim it.

How did it happen?

Court cases today can be traced back to the end of the real estate boom earlier this century. Some include home equity lines of credit. Others come from “80/20” loans, where 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 from now-discredited lenders — contained predatory terms and were marketed to black communities and low-income neighborhoods.

The surge in people who defaulted on mortgage payments after the start of the Great Recession included homeowners with second loans. They were among the people who took out federal loan modification programs, refinanced, or filed for bankruptcy to help keep their homes.

In some cases, the first loans were modified but the second were not.

Some second mortgages were “written off” at this time, meaning the lender had stopped demanding payment. This does not mean that the loan has been forgiven. But that was the impression of many homeowners, some of whom appear to have misunderstood the 80/20 loan structure.

Other borrowers report that they have had trouble getting answers on their second loans.

In the Miami area, Pastor Carlos Mendez and his wife Lisset Garcia signed an amendment to their first mortgage in 2012 after financial difficulties led to defaults and a bankruptcy filing. The couple bought the Hialeah home in 2006, two years after arriving from Cuba, and raised their two daughters there.

Mendez said they were unable to get any replies from the bank about the status of their second mortgage and were eventually told the debt had been or would be cancelled.

Then, in 2020, they received foreclosure paperwork from another debt owner.

Their attorney, Ricardo M. Corona, said they are told they owe $70,000 in delinquent payments plus $47,000 in principal. But he said records show the loan was debited in 2013 and that borrowers are not entitled to any interest payments from years the couple did not receive regular bank statements. The case is pending.

“Despite everything, we fight and trust in justice, believe in God so that we can solve this and keep the house,” Mendez said in Spanish.

Second loans were packaged and sold, some multiple times. The parties behind the lawsuits launched to collect the money now are often investors who buy so-called distressed mortgage loans at deep discounts, lawyers say. Many of the debt buyers are limited liability companies that are not as regulated as large banks.

The plaintiff in the lawsuit against the House of Mendez and Garcia is listed as Wilmington Savings Fund Society, FSB, “not in his individual capacity, but solely as a trustee for BCMB1 Trust.”

A spokeswoman for Wilmington said it acts as a fiduciary on behalf of many trusts and has “no authority in relation to the administration of the properties in the portfolio.” Efforts to find someone associated with BCMB1 Trust to respond to questions have not been successful.

Some individuals facing foreclosure have filed their own lawsuits, citing federal periodic statement requirements or other consumer protection laws. In Georgia, a woman facing foreclosure alleged in federal court that she never received periodic notices of her second mortgage or notices of transfer to new owners as required by federal law. According to court documents, the case was settled in June on confidential terms.

In New York, Prophete is one of 13 plaintiffs in a federal lawsuit alleging that mortgage debt is being sought beyond the six-year New York statute of limitations, resulting in violations of federal and state statutes.

“I think what makes it so damaging is that these are homeowners who have worked very hard to stay current with their loans,” said Rachel Geballe, an associate director at Brooklyn Legal Services, who is handling the case with The Legal Aid Society negotiated. “They thought they would take care of their debt.”

The defendants in the case are credit servicer SN Servicing and law firm Richland and Falkowski, who the lawsuit says represented mortgage funds involved in the lawsuits, including BCMB1 Trust. In court filings, the defendants dispute the plaintiff’s interpretation of the statute of limitations, say they acted properly and are seeking to have the lawsuit dismissed.

“The allegations in the various foreclosure actions are truthful and not misleading or deceptive,” attorney Daniel Richland wrote in a letter to the judge. “The allegations of the plaintiff, on the other hand, are not credible and therefore justify a dismissal.”