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Zombie mortgages haunting homeowners now facing foreclosure

A shocking report claims thousands of homeowners are at risk of losing their homes to “zombie mortgages” purchased by companies, some of which are forcing them into foreclosure without their knowledge.

Many of the shocked homeowners took out second mortgages they thought had been wiped out during the subprime housing bubble of 2004-2008, only to find that the mortgages have come back to haunt them.

NPR investigation They found at least 10,000 old second mortgages where foreclosure proceedings had begun in the past two years.

Karen McDonough of Quincy, Massachusetts, was shocked to learn her home was in foreclosure. Karen McDonough/Facebook

“Those numbers are pretty frightening to me,” Andrea Bopp Stark, an attorney with the National Consumer Law Center, told the outlet.

The problem threatens to spread across the United States.

“If you look at the number of foreclosure filings, or at least the number of attempts to collect on this zombie debt, you’re starting to see the numbers increase dramatically in individual jurisdictions, into the thousands or even more,” said David Weber, a professor at Creighton University School of Law. The New York Times.

“That’s a lot of activity.”

One spring morning two years ago, a Massachusetts nurse walked out her front door to see 20 cars parked near her Quincy home, which she was planning to sell, NPR reported.

“I just felt like something really bad had happened… like someone in my neighborhood had died.” McDonough told NPR.

When she approached one of the people who had driven to her house, he said, “We’re selling your house.”

“This is a foreclosure. We’re going to lose this house.”

McDonough was surprised: She’d owned the house for 17 years and had fallen behind on her mortgage payments.

McDonough fell victim to a so-called “zombie mortgage” that she thought had been resolved. Karen McDonough/Facebook

But her house had a “zombie” mortgage that she wasn’t aware of.

She purchased the home in 2005 for $365,000 with an “80/20” mortgage: One mortgage covered 80 percent of the home’s price, or $292,000, and the other mortgage covered the remaining 20 percent, or $73,000.

“It was the easiest thing I’ve ever applied for,” McDonough told NPR. “I just filled out the paperwork, turned it in, and I was approved.”

McDonough paid her mortgage for the first two years, but after the second year, interest rates skyrocketed, increasing her monthly payments by $700.

When she sought a mortgage modification, she says the company that serviced both loans informed her that the second mortgage would be forgiven.

McDonough took out a loan to buy a house in 2005. Karen McDonough/Facebook

“I was actually in my kitchen, cooking dinner and talking to my agent, and he told me I would never have to make a second mortgage payment again,” she said.

“I was so grateful that the loan terms were changed that I never questioned it.”

McDonough said she is no longer receiving statements for the 20 percent loan, but has recently started receiving phone calls demanding money.

She thought the calls were scams and ignored them.

She said she was told one of the loans had been forgiven. Karen McDonough/Facebook

The letter she received was from a company she had never heard of: First American National.

“It said a figure, and they were asking for payment — like $77,000,” she said. “I just couldn’t believe it.”

McDonough told NPR that First American National Bank continued to call him after that, threatening to foreclose on his debt if he didn’t pay.

McDonough said she called the company that serviced her first mortgage and was told it was likely a scam.

“I was on the phone with them and crying like I was having a nervous breakdown,” McDonough said.

“And they kept saying, we’re going to help you. You can’t lose your home over this.”

But her fears were well founded.

Limited liability companies registered in Delaware, whose owners’ identities are protected by law, bought up bundles of mortgages for pennies when banks were selling them at bargain prices as they failed after the 2008 housing bubble burst.

Because home prices were low after the crash, the mortgages were worthless, but when home prices soared in the years that followed, investors who bought the loans stood to make a profit.

The home McDonough bought for $365,000 is now worth $600,000.

“Zombie mortgages” are loans that were sold at low interest rates, often just cents on the dollar, in the wake of the 2008 housing crisis. steheap – stock.adobe.com

First American National purchased her home at auction for $178,500 and became the legal owner of the house, but McDonough sued, alleging that the company used unfair and deceptive tactics to seize her home, and she continues to live in it.

She continues to make payments on her first mortgage.

“We feel that what happened is terrible,” McDonough said.

“But I’m still really hopeful that I’ll be able to continue living in my home. I’m really hopeful that I’ll win this lawsuit.”

McDonough’s lawyers allege that the second mortgage, which was reportedly forgiven, was sold in 2020 along with about 600 other mortgages to a limited liability company with ties to First American National.

“We believe they systematically and intentionally broke the law,” Todd Kaplan, an attorney with the nonprofit Greater Boston Legal Services, told NPR.

First American National, a small New Jersey-based company, is run by Ira Bailey, who told NPR that he’s been buying up second mortgages for about 20 years.

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