Homeowners face surprise bills from ‘zombie mortgages’

Thousands of U.S. homeowners might get surprise bills related to “zombie mortgages,” according to a Bloomberg investigation. A zombie mortgage occurs when a homeowner thinks their property was taken by the bank through foreclosure, but the process was never finalized, so the home still legally belongs to them.

Before the 2008 housing market collapse, thousands of homeowners took out second mortgages. When the market crash hit, some homes lost their value, and owners could not keep up with their payments. Banks stopped trying to collect on many of those second mortgages because they thought the home wasn’t worth enough to cover losses.

As the housing market recovered and home values increased, these old loans became valuable again. Debt collectors bought them from banks for little money and are now hiring law firms to chase down the debts. The debt collectors are demanding the full loan amount plus years of interest and fees, leaving homeowners shocked.

Debt collectors target old loans for profit

So why would the debt collectors choose now to cash in? Bloomberg reports that debt collectors are making a lot of money from these forgotten loans. Bloomberg says it investigated a Florida-based company called ARCPE, also called ARC, which specializes in collecting zombie debt.

Bloomberg’s report states that it obtained internal documents suggesting ARC may not have followed state and federal laws when attempting to collect on those zombie loans. Bloomberg asked legal and financial experts to review ARC’s internal records.

The experts found possible legal issues, suggesting that ARC may have broken the rules about how much back interest it can charge. ARC refuted Bloomberg’s report and claimed in a statement to the news agency that they are following the law.

How are homeowners reacting?

Bloomberg interviewed 32 people across 14 states who had dealt with ARC. Many of them said they felt pressured and confused by the legal threats and repayment demands sent through ARC’s lawyers.

In some cases, people end up owing more than the original loan just from penalties, interest and legal costs. Homeowners told Bloomberg that they felt they had no choice but to agree to pay back the loan, including all the extra fees, just to avoid foreclosure.

The Consumer Financial Protection Bureau began investigating zombie mortgage collectors (not including ARC), but those efforts were largely halted after the Trump administration weakened the agency earlier this year, according to Bloomberg. The White House told Bloomberg that the work continues, but provided no further details.