“Zombie Mortgages” Forcing Homeowners into Foreclosure

Thousands of homeowners across the United States are at risk of losing their homes due to the resurgence of “zombie mortgages,” according to a recent investigation. These homeowners, many of whom took out second mortgages during the subprime lending housing bubble between 2004 and 2008, believed their debts had been written off. However, they are now discovering that these mortgages are coming back to haunt them.

The investigation revealed that foreclosure activity had been initiated on at least 10,000 old second mortgages in the last two years alone. Andrea Bopp Stark, an attorney at the National Consumer Law Center, expressed concern over the rising numbers. David Weber, a professor at the Creighton University School of Law, also noted a significant increase in foreclosure filings and attempts to collect on this zombie debt.

One such case is that of Karen McDonough, a Massachusetts nurse who was shocked to discover her home was being foreclosed on. McDonough had taken out an “80/20” loan to purchase her home in 2005, with one mortgage covering 80% of the home’s cost and the other covering the remaining 20%. She was under the impression that the second mortgage had been forgiven after she requested a modification due to a significant increase in her monthly bill.

However, McDonough began receiving phone calls and letters demanding payment for the second mortgage, which she initially dismissed as scams. The letters were from First American National, a company she had never heard of, demanding a payment of $77,000. Despite assurances from the company that serviced her first mortgage that it was likely a scam, McDonough soon discovered that her home was indeed at risk.

In the aftermath of the 2008 housing crash, limited liability companies bought up bundles of mortgages for pennies on the dollar. These mortgages, worthless at the time due to low housing prices, became valuable as home values soared in the following years. McDonough’s home, which she bought for $365,000, is now worth $600,000.

First American National bought McDonough’s house at auction for $178,500 and is now the legal owner. McDonough is currently living in her home and has filed a lawsuit alleging that the company used unfair and deceptive practices to foreclose on her home. Her lawyers claim that the second mortgage, which she was told had been forgiven, was sold in 2020 along with around 600 other mortgages to an LLC connected with First American National.

Todd Kaplan, an attorney with the nonprofit Greater Boston Legal Services, accused First American National of systematically and deliberately breaking the law. The company, a small New Jersey-based business run by Ira Bailey, has been buying up second mortgages for around 20 years.