May 10, 2024 • 30min

Zombie mortgages are coming back to life

Planet Money

This episode of Planet Money investigates the phenomenon of "zombie mortgages" - old second mortgages from the housing bubble era that are now coming back to life and threatening to take away people's homes, even if they've been faithfully paying their first mortgage for years.

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Key Takeaways

During the housing bubble in the 2000s, many homeowners took out "zombie" second mortgages that were later thought to be forgiven, but are now coming back to haunt them.
These old second mortgages are being bought up by debt collectors for pennies on the dollar, who then aggressively pursue foreclosure even if the homeowner is current on their first mortgage.
Thousands of homeowners across the country are facing foreclosure threats from these resurrected zombie mortgages, despite believing the debt was long gone.
Lawyers are finding legal loopholes, like the lack of monthly statements required by regulation Z, to fight the foreclosures in court. But the scale of the problem remains unclear.
Homeowners like Karen McDonough are stuck in limbo, still living in their homes but facing the constant threat of losing them to these zombie mortgages.

Introduction

This episode of Planet Money investigates the phenomenon of "zombie mortgages" - old second mortgages from the housing bubble era that are now coming back to life and threatening to take away people's homes, even if they've been faithfully paying their first mortgage for years.

The story follows Karen McDonough, a nurse in Quincy, Massachusetts, who one day found a group of strangers on her lawn telling her they were selling her house in a foreclosure sale. Despite being current on her mortgage payments, Karen was facing the loss of her home due to a second mortgage she thought had been forgiven long ago.

Topics Discussed

The Rise of "Zombie" Second Mortgages (9:05)

During the housing bubble in the 2000s, many homeowners took out two mortgages - a first mortgage for the majority of the home's value, and a second mortgage to cover the down payment.
When the housing market crashed in 2008, many of these second mortgages were essentially worthless, as the home's value had plummeted below the first mortgage.
Homeowners like Karen were told their second mortgages had been forgiven, but the debt was never truly erased.

The Debt Collectors Emerge (16:28)

As home prices have risen in recent years, the value of those old second mortgages has increased.
Debt collectors have been buying up these zombie second mortgages, sometimes for pennies on the dollar, and then aggressively pursuing foreclosure to collect on the debt.
The debt collectors argue that the homeowners signed up for the loans and are responsible for paying them back, even if they were told the debt was forgiven.

The Scope of the Problem (12:03)

NPR's investigation found at least 10,000 people across several states facing foreclosure threats from these resurrected zombie second mortgages.
The problem appears to be widespread, but government officials have been unaware of the full scale until now.

The Legal Battle (19:11)

Lawyers like Christy Kelly are fighting the zombie mortgage foreclosures in court, using legal loopholes like the lack of required monthly statements under Regulation Z.
However, the laws around second mortgages are murky, and it's difficult to prove the debt was truly forgiven, even if homeowners were told it was.
Homeowners like Karen are stuck in limbo, still living in their homes but facing the constant threat of losing them.

The Role of Wall Street (14:31)

The zombie mortgage problem was created during the run-up to the 2008 financial crisis, when Wall Street firms like Morgan Stanley were packaging and selling these risky mortgages.
When the housing market crashed, these firms were left with worthless mortgage-backed securities, which they then sold off in bundles to debt collectors like David Gordon.
Gordon and others saw an opportunity to buy these distressed mortgages for pennies on the dollar and then pursue foreclosure as home prices rebounded.

The Human Impact (20:14)

For homeowners like Karen, the zombie mortgage threat has been devastating, causing immense stress, anxiety, and the very real risk of losing their homes.
Despite being current on their first mortgage, these homeowners are facing foreclosure and eviction, upending their lives and financial security.
Karen's story illustrates the human toll of this issue, as she was forced to pack up her home and nearly lost it all before finding legal help to fight the foreclosure.

Conclusion

The zombie mortgage crisis is a complex and troubling issue that has emerged from the ashes of the 2008 housing bubble. Thousands of homeowners across the country are facing the threat of losing their homes due to old second mortgages they thought were long gone.

While lawyers are finding legal strategies to fight the foreclosures, the scale of the problem remains unclear, and the ultimate fate of homeowners like Karen hangs in the balance. This episode serves as a cautionary tale about the lasting impacts of the housing crisis and the need for greater consumer protections and transparency in the mortgage industry.

Ultimately, the zombie mortgage saga highlights the importance of home ownership as a cornerstone of financial security and the American dream. As the investigation reveals, even those who have faithfully paid their mortgages for years can still have that dream snatched away by the resurrected ghosts of the past. The fight to save these homes is ongoing, but the stakes could not be higher for the families caught in the crosshairs of the zombie mortgage apocalypse.