Zombie Mortgages Forcing Massachusetts Homeowners into Foreclosure

Earlier this month the Wall Street Journal published an article highlighting a relatively new phenomenon with respect to foreclosures. Debt buyers are purchasing old, charged-off second mortgages and using them as a basis to foreclose. 

Most of these second mortgages were charged-off more than a decade ago. In the early 2000’s, a wave of predatory lending practices and the subsequent securitization of high-risk mortgages led to the subprime mortgage crisis from 2007-2010 which left many homeowners upside-down on their properties, unable to refinance and unable to afford their high-interest mortgages. In many instances, borrowers were given 80/20 loans – a primary and secondary mortgage to finance the same home purchase, often with both loans issued by the same lender. 

Under the federal Home Affordable Mortgage Program (“HAMP”), between 2009 and 2016 many borrowers were provided with loan modifications which provided affordable mortgage terms to allow them to stay in their homes and bring delinquent loans current. Some borrowers believed that the modifications incorporated both their first and second mortgages, and thought they were entirely current. In other cases, homeowners were aware that the second mortgages were charged off long ago but didn’t know that they could still be resurrected and enforced against them.   

Until recently, it didn’t make sense for a second-lien mortgagee to foreclose, because the second-lien holder doesn’t receive any proceeds from the foreclosure sale unless/until the first lien mortgage is fully satisfied. In most cases, it didn’t make financial sense for a second mortgage lender to foreclose. Now, where home values have soared over the past three years, the amount of equity has increased significantly, and debt buyers are seeking to capitalize by purchasing these defaulted second mortgages for a fraction of the principal value and foreclosing to collect the full second mortgage plus interest and fees. 

Now, a debt buyer can, for example, pay about $35,000 to buy a second mortgage that was issued in 2006 with an adjustable-rate mortgage that capped at 11.5%, was charged off in 2009 with $62,000 in principal still owing, and foreclose in 2023 to collect $161,820 (plus foreclosure related fees). For the debt buyer, that’s about a 260% return on investment. 

The Consumer Financial Protection Bureau (“CFPB”) has investigated (Zombie second mortgages: When collectors come for long forgotten home loans | Consumer Financial Protection Bureau (consumerfinance.gov) and has recently issued guidance to debt collectors to make it clear that a debt buyer who institutes a court action to foreclose on the basis of a charged-off mortgage when it is beyond the statute of limitations to collect the debt can be prosecuted for violation of debt collection laws. 

But that does nothing to help Massachusetts homeowners, because even though the statue of limitations to collect a debt is six years, Massachusetts is a non-judicial foreclosure state – a mortgagee doesn’t have to go to court to foreclose. And foreclosure is considered an action “in-rem,” meaning against the property – it’s not a debt collection action against the homeowner unless the mortgagee sues them in court for a deficiency. That makes Massachusetts all the more attractive to debt buyers seeking to capitalize on the increase in home values here by purchasing old defaulted second mortgages and foreclosing. 

If a second-lien mortgage holder is threatening foreclosure against you, seek legal assistance quickly. In many cases, the debt buyer has very little documentation of the mortgage, does not have a complete payment history and may not even have the original Note. Because this is a non-judicial foreclosure state, a borrower must take affirmative legal action to stop a foreclosure from occurring. If you wait and try to sue after the foreclosure is already complete, even if you can prove the debt-buyer acted wrongfully, while you may be entitled to damages, you may still nonetheless lose your home. 

Attorney Thurbide has successfully represented dozens of homeowners to stop scheduled foreclosures. If you are receiving collection notices or foreclosure threats relating to a zombie mortgage, call KMT LAW PC for a free consultation.