Nurse shocked to discover family home of 17 years was sold behind her back – due to mysterious loophole that could affect scores of Americans

So-called “zombie mortgages” are coming back to life in the United States as housing prices rise, experts warn.

In the lead-up to the 2008 housing crash, millions of Americans took out a second mortgage on their homes, which they then defaulted on during the crisis.

Lenders did not foreclose because falling home prices made recovery of the money unlikely. Owners often thought the debt had been forgiven.

But these dormant loans are now coming back to life – hence the term “zombie mortgage”.

Forgotten mortgages were bought for pennies on the dollar by debt collectors who patiently waited for house prices to hit record highs – to make it worth chasing the money.

Now, after adding in the retroactive fees and interest, they come to collect the money, which often means foreclosing on the homes to capture a huge share of the increase in value.

Karen McDonough, of Quincy, Massachusetts, thought her second mortgage had been forgiven. That was until she stumbled across a foreclosure auction on her front lawn.

McDonough, a registered nurse, had owned the home for 17 years, she told NPR, as part of a recent investigation into zombie mortgages.

She had raised two children in the house and paid off her mortgage every month.

When she bought the house in 2005, she took out an 80/20 loan, which meant she had two mortgages: one covering 80 percent of the house’s value and another covering the remaining 20 percent. .

But two years later, her first mortgage was adjusted and the monthly payments suddenly increased by $700 a month.

A year later, McDonough was able to have her loan modified to lower the interest rate and make it affordable again.

She said her mortgage company told her that as part of the modification, the second mortgage was canceled.

She stopped receiving statements on the second mortgage and assumed it was dead.

Fast forward to 2022, when a group of men gathered in his driveway for a foreclosure auction.

McDonough had received phone calls demanding money, but he thought it was a scam.

She claims her first mortgage company also told her to ignore the calls because it was most likely fraud.

The men on the lawn told him: “It’s a seizure. You’re going to lose this house,” McDonough told NPR.

It turned out that her second mortgage had been sold to one company in a batch of 600 others, rather than being written off as she had thought.

A few months after the auction, she received an orange eviction notice posted on her front door.

McDonough still lives in her

home and filed a lawsuit alleging that the company that purchased her second mortgage then used unfair and deceptive practices to foreclose on her home.

“I feel like what happened was a terrible thing,” McDonough told the outlet.

“But I’m still hopeful that I’ll stay home. I’m really hopeful that I’ll win this case.

A key detail that can be used against debt collectors is that, in many cases, they add interest and a year’s late fees to the amount originally borrowed by the homeowner.

Although companies are allowed to do this under federal regulations, they must send monthly statements to the owner detailing the additional costs.

In many cases, like McDonough’s, owners received no information about the loans for years.

And she is by no means alone.

In New York, NPR found at least 10,000 old second mortgages foreclosures initiated in the last two years alone. The loans date back to the subprime housing bubble of 2004 to 2008.

Researchers also found at least 500 old second mortgages in Maryland where foreclosure action had been taken.

“The numbers scare me a lot,” Andrea Bopp Stark, an attorney at the National Consumer Law Center, told the outlet.

There are fears that the problem will be widespread across America.

“If you look at the number of these foreclosures filed, or at least the attempts to collect on this zombie debt, you start to see the numbers increase dramatically into the thousands, if not more, in every jurisdiction,” David Weber, a professor at Creighton University Law School, told the New York Times.

“It’s a lot of activity. »

He attributed the increased attention to zombie mortgages to rising house prices.

Rising property values ​​build equity in a property, allowing the holder of a second mortgage to make money even after the first mortgagee is paid, Weber said.

This is because when a home with two mortgages goes into foreclosure, the loans are waiting to be paid off.

When selling, the first mortgage takes the money needed to cover the debt, and what’s left goes toward the second mortgage.

When prices collapsed in 2008, second mortgages in many cases appeared worthless, NPR reported.

But now that prices have increased, if a house goes into foreclosure, there is enough money to pay off both mortgages.

In McDonough’s case, the value of his home increased from $365,000 in 2005 to more than $600,000.