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'Zombie mortgages' threaten thousands of homeowners, an NPR investigation finds

JUANA SUMMERS, HOST:

An NPR investigation has found that thousands of Americans are at risk of losing their homes over what are called zombie second mortgages. Those are mortgages that the homeowner thought were long gone and dead but lately have been coming back to life. NPR's Chris Arnold from our investigations team and Robert Smith with Planet Money have more.

ROBERT SMITH, BYLINE: Over the past year, we've been talking to people all over the country who are seeing these old zombie debts suddenly rise from the grave.

CHRIS ARNOLD, BYLINE: Yeah. In Virginia, we spoke with Andre and Sophia Lipford, who've owned their house for 18 years. He's a contractor. She's a surgical technician.

SOPHIA LIPFORD: I saw this foreclosure letter, and I just panicked and started to cry that we going to lose our home.

SMITH: In Oxnard, Calif., we talked to Liz and Paul Chavez. A mortgage servicer had scheduled a foreclosure sale and was trying to collect nearly $250,000.

LIZ CHAVEZ: It just feels like highway robbery because that is our equity.

ARNOLD: In Quincy, Mass., Karen McDonough told us that she looked out her window and was surprised to see a group of men auctioning off her home on her front lawn. She's lived there 17 years.

KAREN MCDONOUGH: I was like, shaken, just, like, really overwhelmed. I'm a mother, and I'm a nurse, and I'm being evicted from my house that I've been making monthly payments on and that I'm current with.

SMITH: So, OK, here's what's been happening. Back during the housing bubble days, a lot of people who bought houses got not one but two separate mortgages on their house. The second one was smaller. Often it was to cover the down payment.

ARNOLD: Then the financial crisis hit, and millions of Americans were losing their homes to foreclosure - so many people that the government pushed banks to do what are called loan modifications to lower people's interest rates so they could afford to keep their homes.

SMITH: Many homeowners say back then they were told that, as part of the whole process, their second mortgages were being resolved, forgiven, put to rest.

ARNOLD: But our investigation found that there are thousands of people who've recently gotten foreclosure notices over what appear to be old zombie second mortgages.

SMITH: And many of these loans had been bought up by investors, sometimes for pennies on the dollar, and we found one of the people in the business willing to talk to us.

DAVID GORDON: My name is David Gordon. I run a company called ARC Private Equity.

ARNOLD: Gordon says people often think that their loans were cancelled, but in many cases, he says...

GORDON: They still exist. It's not like they went away. And I think people were waiting on the sidelines to collect on those at some points.

SMITH: They were waiting because if you foreclose on a house, the first mortgage gets paid back first, and any money left over goes to the second mortgage.

ARNOLD: So back after the housing crash, homes weren't worth enough to even pay back the first mortgage.

SMITH: But home prices are up. There's more money for the debt collectors to go after. If they foreclose now and sell the house, there's enough money to pay back both mortgages.

GORDON: Nothing is free in this world, and if you signed up for a loan, you know what you signed up for. It blows my - it just - you know, it is what it is.

SMITH: You know what you signed up for, sure. But a lot of the homeowners we talked to say they believed that what they had signed up for had changed, that the second mortgage was forgiven.

ARNOLD: And the companies often are demanding far more than what was originally borrowed, sometimes more than two times the original loan, hundreds of thousands of dollars.

SMITH: Lately, lawyers across the country have been getting panicked calls from homeowners blindsided by all of this. Kristi Kelly has a consumer law firm in Fairfax, Va.

KRISTI KELLY: It is not right. You should not lose your home.

ARNOLD: Kelly says the record-keeping on these old loans - it's really bad.

KELLY: There's no database of, like, all the loans that are canceled or forgiven so you can go and verify it.

SMITH: But she says she's found a way to fight back against the debt collectors, kind of like a crossbow for fighting zombies. She says many of these debt collectors add on a huge amount of retroactive interest in fees.

ARNOLD: Federal law, though, requires that, to charge interest, the homeowner over time has to be getting monthly statements. And in many cases, Kelly says, that just never happened. Nobody got any statements for 10 or 12 years.

SMITH: So Kelly can just say in court, these guys are breaking the rules and asking for way too much.

KELLY: In some ways, the greed of the second mortgage holders has given people leverage in their cases because they want to go and get every last dollar and take every dime of equity. They then open themselves up to serious legal consequences.

ARNOLD: Kelly has used this strategy to help hundreds of homeowners over the past couple years. She's helped two of the people we heard from earlier to keep their homes.

SMITH: Karen McDonough, though, the nurse in Quincy, Mass. - her case is still ongoing. She's filed a lawsuit, and a judge is letting her stay in her home while the case plays out in court. I'm Robert Smith.

ARNOLD: And I'm Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

NPR correspondent Chris Arnold is based in Boston. His reports are heard regularly on NPR's award-winning newsmagazines Morning Edition, All Things Considered, and Weekend Edition. He joined NPR in 1996 and was based in San Francisco before moving to Boston in 2001.