Updated May 18, 2024 at 06:00 AM ET
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.
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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.
"The numbers to me are very scary," said Andrea Bopp Stark, an attorney at the National Consumer Law Center who has been looking into zombie second mortgages. She has seen anecdotal examples. But foreclosures are notoriously difficult to track — recorded in different ways at the local level in thousands of counties. "It's just so hard to quantify," she said.
NPR's investigation is now shining a light on some of that. "This really is a problem," Stark said.
Zombie second loans can be perilous for homeowners because they were real mortgages, signed 15 or 20 years ago, and often there are still liens recorded on the properties. Stark says that this can make it easy for investors that now own the loans to foreclose.
NPR spoke to other homeowners across the U.S. who are seeing mortgages they thought were dead come back to haunt them.
"I saw this foreclosure letter and I just panicked and started to cry," said Sophiea Lipford in Alexandria, Virginia. She and her husband, Andre Lipford, have owned their house for 18 years and raised their kids there. He's a contractor; she's a surgical technician. "We're gonna lose our home," she told NPR.
Sixty-three-year-old Fredis Hernández, a home improvement contractor also in Virginia, told NPR that a company was moving to foreclose on him over an old second mortgage. "I call it a ghost," he said. Hernández's son and his son's family live with him — three generations under one roof. "I'm scared," he said.
In Oxnard, Calif., Liz and Paul Chavez spoke to NPR just a week before a foreclosure sale that was scheduled by a company trying to collect nearly $250,000, counting retroactive interest, on a long-defunct second mortgage. That was about $100,000 more than they had originally borrowed. "It just feels like highway robbery because that is our equity," Liz Chavez said.
Millions of Americans got second mortgages during the housing bubble
McDonough remembers the first time she drove up to her little future home in Quincy. It was 2005. She had just gotten divorced and was renting an apartment nearby with her two sons.
"I thought the size was kind of charming. ... It had a little yard," she says. "I thought it would be perfect." And for $365,000, it seemed affordable on her income as a nurse.
There was only one problem: McDonough had a good job and modest savings, but she hadn't saved up a big down payment for a house.
Back then, though, the housing bubble was heating up and mortgage companies were finding all kinds of ways to loan people money. And one was a system to get rid of the down payment.
Instead of just one mortgage, lenders gave homebuyers two mortgages.
The first loan covered 80% of the value of the house. And the second mortgage covered the other 20%. They were called 80/20 loans, and that second mortgage meant a homebuyer didn't need to come up with a down payment.
"It was the easiest thing I've ever applied for," McDonough said. "I just filled out paperwork and submitted it and I was approved."
Her first mortgage was for $292,000, and the second mortgage was for $73,000. The yellow, cottage-size, two-bedroom house was hers. She and her kids moved in.
"I gave them the master bedroom ... because they shared that room, and then I took the smaller room," she said. "But it was good."
And then, as she slept each night in that tiny bedroom, a couple of years went by, and the housing bubble collapsed, sending the world into the worst financial crisis in generations. Banks were going under; people were losing their homes.
A big reason for this was that the terms of many of those housing-bubble-era mortgages had a time bomb inside them. After two years, the interest rates on the loans were set to explode and go up much higher.
In 2007, McDonough's first mortgage adjusted, and the monthly payments were suddenly $700 a month higher, which she couldn't afford.
This was happening to millions of Americans. It was happening to so many that the federal government launched a nationwide intervention — a loan modification program to save at least some people from foreclosure. In 2008, McDonough was able to get her first mortgage modified to lower the interest rate and make it affordable again.
This was the crucial moment that would eventually lead to those men standing on her front lawn.
McDonough says her mortgage company told her not to worry about the second mortgage anymore, that it was written off and forgiven.
"I was actually in my kitchen. I was cooking dinner, and I was talking to a representative ... and he told me I would never have to make a payment again on the second mortgage," she said. "And I just didn't question any of it 'cause I was so grateful that the loan was modified."
There didn't seem to be any reason to question it. The same company had given her both mortgages. She says that after a while she stopped getting statements on the second mortgage. She thought it was dead.
Higher home prices wake the zombies
Then, in 2020, she received a letter in the mail from a company she had never heard of, First American National. It said she owed the company money.
"It had an amount and they wanted a payment ... like $77,000," she said. "I was kind of in disbelief."
She says she called the number listed in the letter and spoke to a man who said he was a lawyer with First American National.
"I'm like, 'Why are you doing this?' And he goes, 'Well, why do you think I'm doing this?'" McDonough said the man kept answering her questions with other questions. "I just thought right away it was fraud."
She decided to ignore it. But soon it became impossible to ignore. First American National kept calling and threatening to foreclose on her house if she didn't pay.
McDonough eventually figured out the calls were about that old second mortgage. She called the company managing her first mortgage, the loan she has been paying for nearly 20 years since she bought the house, to get its advice.
She says a representative told her that these calls and letters were probably some kind of fraud.
"I was crying on the phone with them, like having a nervous breakdown," McDonough said. "And they kept saying like we're gonna help you. You can't lose your home through this." McDonough's mortgage company told NPR it has not found any record of this conversation.
"An investor deserves to make their money back"
Through public records requests, NPR obtained the names of the companies that have taken a first step toward foreclosure on what appear to be zombie second mortgages in Maryland and Massachusetts.
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Many have cryptic names such as BCMB1 Trust, FirstKey LLC and ARCPE. NPR attempted to contact all of them, but many are LLCs registered in Delaware, which makes it difficult to know who owns them. But the co-founder of one of these companies agreed to do an interview to explain why these old mortgages are resurfacing now.
"I'm not looking to take anybody's home — I want to make that clear," said David Gordon, the co-founder of ARC Private Equity, headquartered in Miami Beach, Florida.
Gordon doesn't own McDonough's mortgage. But he has bought a lot of old mortgages like hers and has sent letters through a debt collection firm asking for money and sometimes threatening foreclosure.
"An investor deserves to make their money back," Gordon said. "And there is real money at stake."
The zombie mortgage problem was created during the run-up to the 2008 financial crisis. Gordon was there watching it firsthand. He was working on Wall Street at Morgan Stanley, bundling up mortgages that were being made to homeowners like McDonough and then selling them off as mortgage bonds.
After millions of people ended up defaulting on those mortgages, Morgan Stanley was on the brink of going under. Gordon says he expected to be laid off any day.
"We were playing literally putt-putt golf on a trading desk for about six weeks," Gordon said. "We all knew it was going to happen — it was a matter of when. ... Wall Street loves you one day, hates you the next day."
And fires you the day after that. Gordon was suddenly unemployed. But he noticed something. All those mortgages he had helped package into securities and sell for Morgan Stanley — they were on fire sale. The bank was a sinking ship, and it was throwing bundles of dodgy mortgages overboard — mortgage bonds that had some good loans mixed in with the bad.
"I'm looking at some of these bonds that were traded that we helped create. And that's when I had the aha moment," Gordon said. "There's a great opportunity to have a good business."
The business is to buy these bundles of mortgages for sometimes pennies on the dollar. Some of them were worthless. The people who borrowed the money would never pay it back. But other mortgages might be worth something. And for the second mortgages, that was particularly true if you were willing to wait.
Gordon and other investors like him in the years that followed bought up thousands of these loans.
Remember, though, that Karen McDonough and other homeowners say that they had been told that they didn't need to worry about those second mortgages anymore.
Gordon said he hears this all the time. He said people might think they had their second loans canceled or forgiven, perhaps sometimes they were even told that by their mortgage companies.
But in many cases, he says, "they still exist."
"It's not like they went away," Gordon said. "People were waiting on the sidelines to collect on those at some point."
And now something big has changed in the real estate market that is causing debt collectors to come off the sidelines: home prices.
That's because when a house with two mortgages gets foreclosed on, the loans are waiting in line to get paid back. If a house is sold, the first mortgage takes all the money needed to cover that debt, and anything left over goes to the second mortgage.
So when home prices collapsed back in 2008, the second mortgages seemed worthless. If the owner of the second loan foreclosed and sold the house, there wouldn't even be enough money to cover the first mortgage, so there would be nothing left for the second.
But now that home prices have risen, it's an entirely different story. If a house gets foreclosed on, there is plenty of money to pay off both mortgages.
This is what was happening to McDonough. The house she bought for $365,000 in 2005 is now worth more than $600,000.
"You know what you signed up for"
Gordon told NPR that he's reasonable, he follows the rules, and he is willing to negotiate with homeowners. He says he'll even slightly lower the amount he says homeowners owe in some cases.
"We're trying to work with our borrowers," Gordon says. "Nine times out of 10, we're working with our borrowers."
But he said if somebody borrows money, they have to pay it back. These second mortgages that were made many years ago helped people buy homes that have since risen so much in value.
So he says if somebody doesn't pay or respond, he does foreclose on homes.
"Nothing is free in this world, and if you signed up for a loan, you know what you signed up for," Gordon said. "It is what it is."
But in McDonough's case, she says she was told that what she had signed up for had changed — that the second mortgage was forgiven.
And the debt collectors weren't just asking for the original $73,000 she borrowed. One document shows they were trying to collect more than double that — $184,000.
A mountain of interest and fees
McDonough says that in the midst of getting debt collection calls, she called the company she pays every month for her first mortgage. It's a mortgage servicing company named PHH. She says PHH told her it was all probably just fraud and to ignore it.
"PHH told me not to talk to them anymore — don't give them any information, hang up on them," McDonough said. "So then I stopped talking to them."
This would turn out to be exactly the wrong thing to do. PHH told NPR that the company has not been able to find any record of giving McDonough this advice or even that it told her years ago that the second mortgage was forgiven.
In 2021, that mysterious company, First American National, took steps toward foreclosing on McDonough's home. It sent her letters and took out an ad in a local newspaper, and eventually the following year, that group of men parked their cars and walked up onto McDonough's lawn that spring day.
They auctioned her home. And the winning bidder in the end was First American National.
The house is now worth more than $600,000. First American National bought it for $178,500.
A few months after the auction, McDonough says, she got an orange eviction notice posted on her front door.
"I saw the orange thing. ... It said you have like 72 hours to get out." This was Friday, July 1, ahead of the holiday weekend.
"I didn't sleep, and I just started packing everything," McDonough said. "I was crying for three days straight. I just packed."
McDonough was also frantically calling lawyers.
Most of them told her it was too late. Her house was already sold. There was nothing they could do. But a lawyer with a nonprofit legal aid group called her back and told her to stop packing. She might not have to move out. She could still fight this.
Is there any way to stop the zombies?
"There are lawyers and people out there willing to help you because it is not right," said Kristi Kelly, who has a consumer law firm in Fairfax, Virginia. "You should not lose your home."
Kelly, who does not represent McDonough, started out doing legal aid work in the wake of the 2008 housing crash. And like most people, she thought the whole housing bubble debacle was over and done with. But then a few years ago, she began to get calls from people who were receiving threatening letters about old second mortgages.
"You see like a lot of scams as a consumer lawyer, and I thought this can't be right," says Kelly. Then she started digging into all of it, and what she found was scary because these were real mortgages from back during the housing bubble. She began representing some homeowners and hearing from more and more people. "Then I realized ... it's a new trend."
Kelly and her clients asked the debt collectors for records on these old second loans, and she says what she saw was ugly. Some of the loans have no documentation. No payment history. The recordkeeping was terrible.
And she said she was struck by how cheap these mortgages can be bought and sold for. These companies are calling up homeowners demanding tens of thousands of dollars. But Kelly found that sometimes they have purchased that debt for almost nothing.
"We have a case where a portfolio of approximately 9,000 loans was sold for $6,000," she says. "And so each loan was sold for less than a dollar."
Sometimes companies pay more than that for the debt, Kelly says — she has seen examples where a company paid $20,000 or $30,000 for a second mortgage. But a bad-debt buyer can still make multiples of that by foreclosing on the home.
"They can take everything from you," Kelly says. "That is like stealing from somebody, and it's just so wrong."
It seemed wrong to Kelly, but was it illegal? She started looking for things she could present to a judge to get these foreclosures stopped, pouring through federal and state laws and previous court cases. She says there's plenty of precedent and protections about first mortgages and foreclosures. But this whole situation with second mortgages that people thought were long dead appeared to be new.
"That was like another panic, like there's no protections," said Kelly. "My client thought their loan had been canceled or forgiven, but there's no database of all the loans that are canceled or forgiven so you can go and verify it."
But then Kelly saw something big that the debt collectors might have overlooked — a rule they had either missed or ignored in the regulations. It was something she might be able to fight them on.
A crossbow for fighting zombies
In many cases, debt collectors were adding on years' worth of interest and late fees on top of the amount the homeowner had borrowed initially — sometimes doubling the size of the debt.
Federal regulations say a company can do that, but it has to send monthly statements like the ones you get for credit cards and student debt.
"Regulation Z, which is part of the Truth in Lending Act," Kelly said. "It requires that monthly statements be sent if there is interest assessed on a mortgage."
In many cases, she says, that just never happened. The homeowners never received any kind of communication about these loans for years. And debt collectors piled on massive amounts of interest and late fees retroactively.
"In some ways, the greed of these second-mortgage holders has given people leverage in their cases," Kelly said. "Because it's just not good enough to collect the value of the note, and they want to go and get every last dollar and take every dime of equity."
By violating Regulation Z, Kelly says, "they then open themselves up to serious legal consequences and provide consumers the leverage they need to stay in their homes."
This is just one strategy, but Kelly has been using this approach to help homeowners in dozens of cases. She just resolved a class action case where she was able to get the names of nearly 300 homeowners from one company and help them all.
Fredis Hernández in Virginia was one of them. "It's 100% sure that I won't lose my little house," he said. "Thank God."
Still, Kelly feels like she is one lawyer in a lifeboat desperately trying to pull in all the people she can rescue but knowing that there must be thousands more out there who need help.
She says she'd like to see state attorneys general and federal regulators such as the Consumer Financial Protection Bureau do more to enforce existing laws.
"If the CFPB and other regulators can investigate and try to crack down on certain players that are doing this," Kelly says, "maybe they can set an example for the industry and let them know that that type of behavior is not acceptable."
But she says they need to move quickly.
"It's a now problem," Kelly says. "You know, how many people are going to lose their home this month?"
"It's still my home"
Despite everything that has happened, Karen McDonough is still in her little yellow house.
The eviction proceedings are on hold while her lawyers push ahead with her case. First American National now legally owns the house. But McDonough is still paying her first mortgage every month. So she's living in a kind of limbo.
"I feel like what happened was a terrible thing," McDonough said. "But I'm still, like, really hopeful that I'm going to stay in my home. I'm really hopeful I'm going to win this case."
In some instances, debt collectors have a legitimate claim to collect what they say they are owed and to foreclose on a home to get it. In other cases, they don't and they haven't followed the rules. Where all that stands with McDonough's case is still playing out.
McDonough filed a lawsuit where she lays out the broad strokes of her story: that she was allegedly told her second mortgage was forgiven, that she didn't get statements and that she was told the debt collection was probably a fraud.
Her lawyers argue that her old second mortgage was resolved, or should have been resolved, years ago when she had a loan modification on her first mortgage.
But instead, they found that it got passed from company to company. It eventually was sold in 2020 in a big batch of about 600 other mortgages to an LLC apparently connected to First American National, which her lawsuit alleges used unfair and deceptive practices to foreclose on her home.
First American National is not a bank. It appears to be a small outfit run by a man named Ira Bailey out of New Jersey. Bailey did not agree to an interview with NPR but said he'd been in the business of buying up second mortgages for about 20 years.
McDonough's lawyers are arguing in the case that First American National played fast and loose with the rules in its efforts to collect on the second mortgage.
"We think that they have systemically and deliberately broken the law," said Todd Kaplan, an attorney with the nonprofit Greater Boston Legal Services.
Among other things, First American National and several other LLCs apparently run by Bailey were fined in 2022 by the state of Massachusetts for operating as unlicensed debt collectors. First American National didn't admit wrongdoing, but it was ordered to stop. McDonough's lawyers allege it then foreclosed on her house anyway, in violation of that agreement.
In a court document, the company disputed McDonough's description of their interactions and denied the allegations in her lawsuit.
Meanwhile, McDonough has been planting pansies and taking care of her yard this spring, even though she doesn't own the house anymore.
"It's still my house," she said. "Like on principle ... it's still my home."
This Planet Money episode was hosted by Chris Arnold and Robert Smith. It was produced by Sam Yellowhorse Kesler. It was edited by Jess Jiang with help from Bob Little. And it was fact-checked by Sierra Juarez. Engineering by Robert Rodriguez with an assist from Patrick Murray. Alex Goldmark is Planet Money's executive producer.
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