What is “Zombie Debt?” Why Homeowners Are Facing Foreclosure on Old Mortgages.

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

“I was shocked,” said Prophet, 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 part of a wave of homeowners who say they have been blindsided by the start of foreclosure actions on their homes over second loans taken out more than a decade ago. The trusts and mortgage loan servicers behind the actions say the loans were delinquent years ago.

Some of these homeowners say they didn’t even know they had a second mortgage because of confusing loan structures. Others find that their second loans have been rolled over with their first mortgage payments or forgiven. Typically, they say they haven’t received statements on their second loans for years while they’ve paid off their first mortgages.

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

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

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

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Should I Pay Zombie Debt?

Although no federal government agency tracks the number of second mortgage foreclosure actions, attorneys helping homeowners say they have increased in recent years. Lawyers say many of the loans are owned by buyers of distressed mortgages and are being pursued now because home values ​​have increased and there is more equity in them.

“They held them without communicating 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 woodwork and threaten to foreclose because now there is value in the property. They can foreclose on the property and actually get something after the first mortgages are paid off.

Lawyers for the loan owners and the companies that service them say they are pursuing a legally owed debt, regardless of what the borrower believed. And they say they are acting legally to claim it.

How did this happen?

Court cases can now be traced back to the end of the housing boom at the turn of this century. Some include home equity lines of credit. Others stem from “80/20” loans, where homebuyers can 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 second loans can carry interest rates of 9% or more and balloon payments. Consumer advocates say the loans — many of which came from since-discredited lenders — included predatory terms and were marketed to communities of color and lower-income neighborhoods.

The rise in mortgage defaults since the start of the Great Recession includes homeowners with second mortgages. They were among the people who took advantage of 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 ones were not.

How many years until debt forgiveness?

Some second mortgages at that time were “discharged,” meaning the lender stopped seeking payment. This does not mean that the loan is simplified. But that was the impression of many homeowners, some of whom clearly misunderstood the structure of the 80/20 loan.

Other borrowers say they’ve had difficulty getting answers on their second loans.

In the Miami area, Pastor Carlos Mendez and his wife, Lisette Garcia, signed a modification on their first mortgage in 2012 after financial difficulties led to missed payments 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 answers about the status of their second mortgage from the bank and were eventually told the debt had been canceled or was about to be cancelled.

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

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

“In spite of everything, we fight and trust in justice, keeping our faith in God, so we can solve this and keep the house,” Mendez said in Spanish.

The 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 troubled mortgage loans at deep discounts, advocates say. Many of the debt buyers are limited companies that are not regulated in the way that the big banks are.

The plaintiff in the lawsuit against Mendez and Garcia’s home is listed as Wilmington Savings Fund Society, FSB, “not in an individual capacity, but solely as trustee of the BCMB1 Trust.”

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

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

How to get rid of zombie debt?

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

“I think what makes it so devastating is that these are homeowners who have worked very hard to get current on their loans,” said Rachel Gebal, deputy director at Brooklyn Legal Services, which leads case with The Legal Aid Society. “They thought they were taking care of their debt.”

The defendants in that case are lender SN Servicing and the law firm Richland and Falkowski, which represented mortgage trusts involved in the lawsuits, including BCMB1 Trust, according to the complaint. In the lawsuits, the defendants challenge the plaintiff’s interpretation of the statute of limitations, say they acted correctly, and want the case dismissed.

“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. “Plaintiff’s contentions, to the contrary, are implausible and therefore require dismissal.”

Associated Press writer Claudia Torrence and researcher Jennifer Farrar contributed.

This article originally appeared on USA TODAY: What is “Zombie Debt?” Homeowners are facing foreclosure on old mortgages.

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