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‘What is Zombie Debt?’ Why Homeowners Face Foreclosure on Old Mortgages


Rose Prophete thought her second mortgage on her Brooklyn home was settled about a decade ago — until she received paperwork that said she owed more than $130,000.

“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 have never contacted me. They never called me.”

Prophete is part of a wave of homeowners who say they were blindsided in starting their foreclosure actions on second loans made more than a decade ago. The trusts and mortgage lending services behind the actions say the loans defaulted years ago.

Some of these homeowners say they don’t even know they have a second mortgage because of the confusing loan structure. Others believe their second loan has been rolled over to their first mortgage payment or forgiven. Often, they say they haven’t received a report on a second loan in years when they paid off their first mortgage.

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

Rose Prophete looks out over her neighborhood from the porch of her townhouse in the Canarsie section of Brooklyn, Thursday, July 28, 2022, in New York.  Prophete, a hospital technician who immigrated from Haiti in February 2000, is struggling to keep his home following foreclosure.  "I will fight to my last breath,"  Prophet said.  (AP Photo/Bebeto Matthews)

Rose Prophete looks out over her neighborhood from the porch of her townhouse in the Canarsie section of Brooklyn, Thursday, July 28, 2022, in New York. Prophete, a hospital technician who immigrated from Haiti in February 2000, is struggling to keep his home following foreclosure. “I will fight until my last breath,” said the oracle. (AP Photo/Bebeto Matthews)

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Should I pay off zombie debt?

While no federal government agency tracks the number of foreclosures on second mortgages, attorneys assisting homeowners say they have risen sharply in recent years. this. Lawyers say many of the loans owned by people buying troubled mortgages are now being pursued because home values ​​have increased and there is more equity in them.

“They kept them, no contact with the borrowers,” said Andrea Bopp Stark, an attorney with the National Consumer Law Center based in Boston. “And then suddenly they came out of the furniture and threatened to confiscate the property because now the property has value. They can foreclose on the property and actually get something after the first mortgages are paid off.”

Lawyers for the loan holders and the companies that service them argue that they are legally pursuing the debt, regardless of what the borrower believes. And they say they are acting legally to claim it.

How did this happen?

Court actions can now be traced back to the end of the housing boom at the turn of the century. Some involve home equity lines of credit. Others are derived from “80/20” loans, where a homebuyer can take out a first loan covering about 80% of the purchase price and a second loan covering the remaining 20%.

Breaking down loans allows borrowers to avoid large upfront payments. But second loans can have interest rates of 9% or more and bubble payments. Consumer advocates say the loans – many originating from discredited lenders – include predatory terms and are marketed in communities of color and low-income neighborhoods.

The rise in mortgage payments after the Great Recession began included homeowners with a second loan. They are among those who have taken advantage of federal loan modification, refinancing or bankruptcy programs to help keep their homes.

In some cases, the first loan was modified but the second loan was not.

How many years until the debt is forgiven?

Some second mortgages at the time were “foreclosed,” meaning the creditor stopped seeking payment. That doesn’t mean the loan has been forgiven. But that is the impression of many homeowners, some of whom have clearly misunderstood the 80/20 loan structure.

Other borrowers said they had trouble getting an answer on their second loan.

In the Miami area, Pastor Carlos Mendez and his wife, Lisset Garcia, signed an amendment to their first mortgage in 2012, following financial difficulties that resulted in defaults and forced payments. filed for bankruptcy. The couple bought the home in Hialeah in 2006, two years after arriving from Cuba and raising two daughters there.

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

Then, in 2020, they received foreclosure papers from another creditor.

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

“Despite everything, we are fighting and believing in justice, keeping faith in God, so we can work this out and keep the house,” Mendez said in Spanish.

Second loans are packaged and sold, some loans in installments. The parties behind the lawsuits that have been brought to the fore are now often investors buying so-called hardship mortgages at a deep discount, advocates say. Many debt buyers are limited liability companies that are not managed the way big banks are.

The plaintiff in the Mendez and Garcia home lawsuit is listed as the Wilmington Provident Fund Association, FSB, “not as an individual but only as a Trustee for the BCMB1 Trust.”

A Wilmington spokesman said it acts as a trustee on behalf of many trusts and has “no authority over the management of portfolio real estate.” Attempts to find someone affiliated with the BCMB1 Trust to answer questions were unsuccessful.

Several 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 has complained in federal court that she never received periodic notices about her second mortgage or notice when it transferred to a new owner, as required by federal law. The case was settled in June on the terms of secrecy, according to court records.

How do I get rid of zombie debt?

In New York, Prophete is one of 13 plaintiffs in a federal lawsuit that claims the mortgage debt being sought exceeds New York’s six-year statute of limitations, resulting in a violation of federal and state law.

“I think what makes it so dangerous is that these are landlords who have worked,” said Rachel Geballe, deputy director of Brooklyn Legal Services, which is litigating the case with the Legal Aid Association. very hard to be able to pay their loans. “They think they’re paying off debt.”

The defendants in that case are loan service provider SN Servicing and law firm Richland and Falkowski, representing mortgage trusts involved in the lawsuits, including the BCMB1 Trust, according to the petition. to sue. In court filings, the defendants objected to the plaintiff’s interpretation of the statute of limitations, saying they had acted correctly and were seeking to dismiss the case.

Attorney Daniel Richland wrote in a letter to the judge: “The allegations in the various foreclosure actions are truthful and not misleading or fraudulent. “On the contrary, the plaintiff’s allegations are unreasonable and therefore should be dismissed.”

Associated Press writer Claudia Torrens and researcher Jennifer Farrar contributed.

This article originally appeared on USA TODAY: ‘What is Zombie Debt?’ Homeowners face foreclosure on old mortgages.

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