Halloween is over, but there are still some scary zombies lurking out there. They're called zombie second mortgages because homeowners took them out 20 years ago and thought they were dead and gone, but then they rise from the grave when companies try to collect or foreclose.
Now the state of Massachusetts has taken action against one of those companies. It reached a settlement that eliminates hundreds of loans that had come back to haunt residents — a move consumer advocates hope to see replicated around the country.
"It puts people's homes at risk, so it is scary," said Massachusetts Attorney General Andrea Campbell. Her office investigated a company called Franklin Credit Management and alleges it has been violating state and federal law by trying to collect money that homeowners didn't actually owe.
"This unlawful conduct will not be tolerated," Campbell said.
Before these loans were zombies, many started out as second mortgages that people borrowed when they bought a house back during the housing bubble two decades ago. Often the second mortgage was taken out to be used essentially as a down payment — so a homebuyer wouldn't have to come up with any actual cash for a down payment.
After the housing market crash in 2008, many of the loans were uncollectable because the payments on the homeowners' adjustable rate loans had risen sharply and homeowners could no longer afford to pay these second mortgages. Home prices had fallen so much that lenders wouldn't get any money if they foreclosed. And many homeowners say they were told that the loans were resolved through loan modifications that lowered their mortgage payments.
But now that home prices have risen so much, some companies are claiming the loans are still valid and they're moving to collect.
"If you look at zombie second mortgages the process itself is unfair," said Campbell. "You have folks who legitimately believe that they have paid a debt or that it has been done away with, and now you have a random company and random strangers coming back decades later to push them to pay something they haven't received a statement on, they knew nothing about, and are often blindsided."
Now Campbell has struck a settlement with Franklin Credit, which declined an interview and in a statement denied the allegations and said it does not admit wrongdoing.
The attorney general's office says Franklin agreed to stop all efforts to collect on its entire portfolio of mortgages for people in Massachusetts — more than 500 old mortgages that will now be resolved.
The settlement involves just one company in just one state. A recent NPR investigation looked across several states and found at least 10,000 zombie second mortgages with foreclosure activity. So there are still many homeowners getting demands to pay these old zombie loans. Some have been losing their houses.
Andrea Bopp Stark, an attorney with the National Consumer Law Center, said she hopes this settlement by the attorney general in Massachusetts is just the beginning.
"I think it's groundbreaking, I think it's really hopeful," said Bopp Stark. "It's kind of a roadmap for other states to use, not just against Franklin, but any [mortgage] servicer or debt buyer or lender who is engaging in this kind of conduct with zombie second mortgages."
NPR's investigation in the state of Maryland uncovered the names of dozens of companies that were moving to foreclose on homes over old zombie loans, including Franklin Credit Management.
The Maryland AG's office says it's received complaints about some of those companies. It won't comment on whether or not it's investigating. Both the Maryland and Massachusetts AG's encourage people to contact their offices if they feel debt collectors are trying to collect money they don't actually owe.
Some companies that now own these old loans tell NPR that they follow the rules and that these debts are often still legitimate and collectable.
Still, Bopp Stark would like to see the federal government take more action, specifically the Consumer Financial Protection Bureau. For one thing, she said, it could clarify exactly what the rules are with this old debt and what the penalties are if the rules are violated, particularly when it comes to companies improperly charging large amounts of retroactive interest.
Rohit Chopra, director of the bureau, told NPR he's aware of the problem of these old zombie loans.
"It's certainly something that freaks a lot of us out, we don't wanna see some of the worst relics of the financial crisis come back to haunt people," Chopra said. "We're often worried that really old debt that may be invalid is being sold and resold and often threatening people when it comes to their financial lives."
If you've had an experience with zombie mortgages, we'd like to hear about it. Share your story here, and we may be in touch.
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