Much like a long-expired person who comes back from the grave as a zombie, homeowners had thought these mortgage debts died a long time ago. Most were second mortgages that had long gone unpaid. In some cases, borrowers modified their primary mortgage without realizing that the second one was still active. And in the wake of the crisis, property values fell so much that second mortgages became “essentially worthless,” the AG says. Despite going unpaid for years or decades, no attempt was made to collect on them, and homeowners never got any mail or any indication that there was still an outstanding balance — until one of these companies buying up debt came calling.
“No New Yorker should face losing their home to a predatory company demanding mortgage payments that have long since expired,” James said in a press release. “These companies are illegally demanding money from homeowners who worked hard to keep their homes.”
The investigation found that debt buyers acquired more than 3,000 zombie mortgages in the state since 2019, most of them tied to second mortgages originating before 2008. They filed dozens of lawsuits in an attempt to collect the debts, including many from more than 12 years ago, which is a violation of a state law limiting lenders from collecting past-due payments more than six years old.
The debt buyers have been ordered to pay $240,000 in penalties and more than $242,000 in restitution to people who paid back expired debt. The companies have also been banned from trying to collect on expired debts in the future, and told to edit their demands in ongoing foreclosure cases so they’re no longer trying to collect expired debts.
A long-dead lending practice
According to the Consumer Financial Protection Bureau, in the years leading up to the 2008 housing crash, a second mortgage, often called a “piggyback mortgage,” was a means of allowing borrowers without adequate down payments to qualify for a mortgage without having to pay for mortgage insurance. A would-be homeowner who had only saved 10% of the purchase price could get a primary mortgage for 80% of the purchase price and a second mortgage for the remaining 10%. Sometimes the second mortgage covered 20%, meaning the buyer made no down payment at all.
When interest rates started to rise, defaults and foreclosures increased dramatically and the subprime mortgage bubble burst. “Piggyback mortgages” were close to worthless.
Many borrowers had their mortgages modified under the Home Affordable Modification Program (HAMP) or similar programs, and thought that covered the second mortgage too. Some of these loans were written off or extinguished, but others were quietly sold to investors who waited years until rising home values made them worth pursuing again.
According to a Bloomberg analysis of public property records, 5.5 million of these mortgages were made from 2002 through 2008, and an estimated 600,000 “piggyback mortgages” remain today.
The scariest surprise ever
After his sister was diagnosed with cancer, Shawn Murphy flew home from South Korea, where he was stationed with the U.S. Army Corps of Engineers, to offer support and refinance his Los Angeles duplex, which he bought in 2003, to help with medical bills.
He discovered a lien for a second mortgage taken out on the property almost two decades ago, he told Bloomberg. Having filed for bankruptcy in 2010, he believed the debt had been erased.
