Rose Prophete believed the second mortgage on her Brooklyn house was paid off almost a decade ago, until she got documentation stating she owed over $130,000.
Six years after arriving in the United States from Haiti, Prophete refinanced her two-family property in 2006. “These individuals never approached me, therefore I don’t even know them. I was never contacted.”
Prophete is among a group of homeowners who claim they were caught off guard by the start of foreclosure proceedings on their properties due to second mortgages obtained more than a decade ago. Trusts and mortgage loan servicers assert that the loans were in default many years ago.
Some of these homeowners claim they were unaware that they had a second mortgage due to the complexity of the loan agreements. Others felt that their second loans were consolidated with their initial mortgage payments or that they were forgiven. As they paid off their first mortgages, they had not received statements on their second loans for several years.
Now they are being informed that the loans were not in fact canceled. Critics refer to them as “zombie debt” since they are existing loans with new collection actions.
Rose Prophete sits on the stairs of her brick home in Brooklyn, New York, on Thursday, July 28, 2022. In February of 2000, Prophete, a hospital technician from Haiti who came to the United States, was surprised by a foreclosure action on the property she had worked three jobs to purchase. Photograph: AP/Bebeto Matthews
“There is no contact with the borrowers”
There is no federal body that counts the number of second mortgage foreclosures, but attorneys assisting homeowners report a significant increase in recent years. Many of the loans, according to the attorneys, are owned by purchasers of bad mortgages and are being pursued now since property values have risen and they include more equity.
Andrea Bopp Stark, an attorney with the National Consumer Law Center in Boston, remarked, “They’ve been holding them without communicating with the borrowers.” “Then, all of a sudden, they appear out of the woodwork and threaten to foreclose because the property suddenly has worth. After the initial mortgages have been paid off, they can foreclose on the property and obtain something.”
Attorneys for the loan owners and servicing agencies contend that they are seeking lawfully owed debt, regardless of what the borrower believed. And they argue they are legally entitled to claim it.
How did this come about?
Predatory clauses
Today’s court cases can be traced back to the end of the housing boom earlier in this century. Some involve home equity credit lines. Others are the result of “80/20” loans, in which purchasers may obtain a first loan covering approximately 80% of the purchase price and a second loan covering the remaining 20%.
By dividing loans, consumers were able to avoid significant down payments. However, the second loans may have interest rates of 9 percent or higher and balloon payments. Consumer advocates assert that the loans had predatory terms and were marketed in communities of color and low-income neighborhoods. Many of the loans originated from lenders who have since been discredited.
After the onset of the Great Recession, the number of homeowners falling behind on their mortgage payments rose, which included those with second loans. They were among those who utilized government loan modification programs, refinanced, or filed for bankruptcy in order to retain their homes.
In several instances, the initial loan was amended while the second was not.
“Charged off” but not forgiven loans
At same time, a number of second mortgages were “charged off,” meaning the creditor ceased pursuing payment. That does not imply that the loan was cancelled. However, this was the perception of a large number of homeowners, some of whom misinterpreted the 80/20 loan arrangement.
Other borrowers report having problems obtaining information regarding their second loans.
Pastor Carlos Mendez and his wife, Lisset Garcia, signed a modification on their first mortgage in 2012, following missing payments and a bankruptcy case due to financial difficulties. Two years after their arrival from Cuba, the couple purchased a home in Hialeah in 2006 and raised their two kids there.
Mendez stated that they were unable to obtain information from the bank regarding the status of their second mortgage and were eventually informed that the debt had been or would be canceled.
Then, in 2020, they received foreclosure documents from a new creditor.
According to their attorney, Ricardo M. Corona, they owe $70,000 in delinquent payments and $47,000 in principal. However, according to the documents, the loan was charged off in 2013, and the loan holders are not entitled to interest payments for the years in which the couple did not receive periodic statements. The situation is pending.
Mendez remarked in Spanish, “Despite everything, we are battling and relying in justice, maintaining our faith in God, so we may resolve this and save the house.”
Ungoverned debt purchasers
Some second mortgages were bundled and resold multiple times. According to campaigners, the persons behind the current court attempts to collect the money are frequently investors who purchase so-called distressed mortgage loans at steep discounts. Numerous debt purchasers are limited liability businesses that are not regulated in the same manner as large banks.
The plaintiff in the Mendez and Garcia lawsuit is named as Wilmington Savings Fund Society, FSB, “not in its own capacity but merely as a Trustee for BCMB1 Trust.”
A spokesperson for Wilmington stated that the company serves as a trustee for numerous trusts but has “no responsibility over the administration of the real estate in the portfolio.” Our attempts to locate a representative of BCMB1 Trust who could answer our queries were unsuccessful.
Some individuals facing foreclosure have launched their own lawsuits based on federal regulations regarding periodic statements or other consumer protection legislation. As required by federal law, a lady facing foreclosure in Georgia asserted in federal court that she never got periodic information concerning her second mortgage or notices when it was transferred to new owners. According to court documents, the dispute was resolved in June on secret terms.
In New York, Prophete is one of thirteen plaintiffs in a federal complaint alleging that mortgage debt is being pursued beyond the six-year statute of limitations, so violating federal and state law.
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Rachel Geballe, a deputy director at Brooklyn Legal Services, which is litigating the case with The Legal Aid Society, said, “I think what makes it so pernicious is that these are homeowners who worked very hard to become current on their loans.” They believed they were paying off their debt.
According to the complaint, the defendants in this case are loan servicer SN Servicing and law firm Richland and Falkowski, which represented mortgage trusts involved in the court actions, including BCMB1 Trust. In court documents, the defendants contest the plaintiff’s interpretation of the statute of limitations, assert that they acted appropriately, and seek dismissal of the lawsuit.
Attorney Daniel Richland wrote in a letter to the judge, “The allegations in the various mortgage foreclosure actions are accurate and not deceptive or misleading.” In contrast, “plaintiff’s allegations are implausible and should therefore be dismissed.”