Zombie 2nd mortgages are coming to life, threatening thousands of Americans’ homes

One spring morning two years ago, Karen McDonough was having tea at her dining room table. She lives in a cozy little two-bedroom house in Quincy, Massachusetts. She looked out her window and saw something unusual.

“There were like 20 cars, and they all came at the same time and they parked in front of my house, across the street, up the street,” McDonough said. “I just had this feeling like something really bad had happened … like maybe somebody in the neighborhood died.”

Something bad was definitely happening — to her.

McDonough put on her shoes, went out to the driveway and approached a group of men, casually dressed, milling around on the lawn. One had a clipboard and seemed to be in charge.

“He had a piece of paper, and I said, ‘What’s happening?’ And he goes, ‘We’re selling your house.'”

It was a foreclosure auction on her home.

This seemed impossible. McDonough had owned the house for 17 years. She’s a registered nurse who worked at the prestigious Massachusetts General Hospital for decades and makes a good living. She raised two kids in the house and pays her mortgage every month.

But back after the housing crash in 2008, like millions of other Americans, McDonough had asked for a modification of the mortgage. Back then, she says, her mortgage company told her a second mortgage she had on the house was forgiven as part of the modification. And she said that seemed to be true — she stopped getting any statements for more than 10 years.

More recently, though, she’d been getting phone calls demanding money. She thought it must be some kind of scam. But now these men on her lawn were telling her, “This is a foreclosure. You are going to lose this house,” McDonough said.

McDonough had fallen victim to what’s called a zombie second mortgage. Homeowners think these loans are long dead. But then the loans come back to life because they get bought up, sometimes for pennies on the dollar, by debt collectors. These companies often tack on a mountain of retroactive interest and fees, even though that can be legally dubious in some cases, and then move to collect and foreclose on people’s homes.

And an NPR investigation found that the practice is widespread.

NPR looked at foreclosure data across several states where records were available. In New York, NPR found at least 10,000 old second mortgages that foreclosure activity had been initiated on in just the past two years. Those loans originated back during the subprime-lending housing-bubble days of 2004 to 2008.

In Maryland, where more detailed information was obtainable, NPR found at least 500 old second mortgages that had been in default and unpaid for more than a decade but now a company has taken the first step toward foreclosure. In other words, more than 500 zombie mortgages in a single state that are now coming back to life as companies file a form with the state indicating they intend to foreclose on the property.

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