‘Zombie debt’: Homeowners face foreclosure of old mortgages

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Rose Prophete thought the second mortgage on her Brooklyn home was resolved about a decade ago – until she received documents claiming she owed more than $130,000.

“I was shocked,” said Prophete, who refinanced his 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 are blindsided by the start of foreclosure actions on their homes over second loans taken out more than a decade ago. The trusts and mortgage managers behind the actions say the loans went unpaid years ago.

Some of these homeowners say they didn’t even know they had a second mortgage due to confusing loan structures. Others thought their second loans had been rolled into their first mortgage payments or cancelled. Typically, they say they hadn’t received statements on their second loans in years as they paid off their first mortgages.

Now they are being told that loans weren’t dead after all. Instead, it’s 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 helping homeowners say they have increased in recent years. Lawyers say many of the loans are owned by distressed mortgage buyers and they are being sued now because home values ​​have risen and there is more equity.

“They held them back, having no communication with the borrowers,” said Andrea Bopp Stark, an attorney at the National Consumer Law Center in Boston. “And then all of a sudden they come out of the woodwork and threaten to foreclose because now there is value in the property. They can seize the property and get something after the first mortgages are paid off.

Lawyers for the owners of the loans and the companies that service them say they are pursuing legitimate debt, regardless of the borrower’s beliefs. And they say they are acting legally to claim it.

The lawsuits now date back to the end of the housing boom of the turn of this century. Some involve home equity lines of credit. Others stem from “80/20” loans, in which buyers could take out a first loan covering around 80% of the purchase price, and a second loan covering the remaining 20%.

Splitting loans allowed borrowers to avoid large down payments. But second loans could carry interest rates of 9% or more and lump sum payments. Consumer advocates say the loans — many from since-discredited lenders — included predatory terms and were marketed in communities of color and low-income neighborhoods.

The increase in the number of people behind on mortgage payments after the onset of the Great Recession included homeowners with second mortgages. They were among those 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 not the second ones.

Some second mortgages at this time were “charged off”, meaning the creditor had stopped demanding payment. This does not mean that the loan has been cancelled. But that was the impression of many homeowners, some of whom apparently misunderstood the 80/20 loan structure.

Other borrowers say they struggled to get answers on their second loan.

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

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

Then in 2020 they received foreclosure papers from another owner of the debt.

Their attorney, Ricardo M. Corona, said they were told they owed $70,000 in overdue payments plus $47,000 in principal. But he said records show the loan was written off in 2013 and the loan holders are not entitled to interest payments stemming from the years the couple did not receive periodic statements. The case is pending.

“Despite everything, we are fighting and trusting in justice, keeping our faith in God, so that we can solve this problem and keep the house,” Mendez said in Spanish.

The second loans were bundled and sold, some multiple times. The parties behind the lawsuits that have been launched to collect the money now are often investors who buy so-called distressed mortgages at steep discounts, the lawyers say. Many of the debt buyers are LLCs that aren’t regulated like the big banks.

The plaintiff in the action against the Mendez and Garcia house is listed as Wilmington Savings Fund Society, FSB, “not as an individual but only as a trustee of BCMB1 Trust”.

A spokeswoman for Wilmington said he was acting as trustee on behalf of numerous trusts and had “no authority with respect to the management of real estate in the portfolio.” Efforts to find someone associated with BCMB1 Trust to answer questions were unsuccessful.

Some people facing foreclosure have filed their own lawsuits citing federal requirements related to periodic reporting or other consumer protection laws. In Georgia, a woman facing foreclosure claims in federal court that she never received periodic notices of her second mortgage or notices when it was transferred to new owners, as required by federal law . The case was settled in June on confidential terms, according to court documents.

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

“I think what makes it so pernicious is that these are landlords who have worked very hard to be current on their loans,” said Rachel Geballe, assistant director of Brooklyn Legal Services, which litigates the case. with The Legal Aid Society. “They thought they were taking care of their debt.”

The defendants in the case are loan servicer SN Servicing and law firm Richland and Falkowski, which represented mortgage trusts involved in the lawsuits, including BCMB1 Trust, according to the complaint. In the court filings, the defendants challenge plaintiff’s interpretation of the statute of limitations, say they acted correctly, and seek to dismiss the lawsuit.

“The allegations in the various mortgage foreclosure actions are true and not misleading or deceptive,” attorney Daniel Richland wrote in a letter to the judge. “The plaintiff’s allegations, on the other hand, are implausible and therefore warrant rejection.”

Associated Press writer Claudia Torrens and New York researcher Jennifer Farrar contributed to this report.