Zombie Debt Buyers

Zombie Second Mortgage Come Alive Again for Pennies on the Dollar

A lingering afterthought of the 2008 Great Recession is thousands of second and third mortgages (sometimes in the form of a home equity line of credit, or HELOC) for which borrowers have not heard from anyone for years.  The original lenders and their immediate successors made these loans under guidelines that are now not permitted (since the reforms of 2008 and thereafter).  And many of those lenders wrote the loans off when they went out of business or sold off to another (i.e., Countrywide, GMAC/DiTech, WaMu, IndyMac, New Century, etc.).  However, when all collection stopped, the servicers did not release the liens on the loans recorded in the land records.  

A recent article by H. Dennis Beaver in Kiplinger described the problem as follows:

Like ghosts in a haunted house, law firms are pursuing property owners, threatening them with the loss of their property for unpaid second mortgages —  “zombie” mortgages. Some people thought their mortgages were discharged in bankruptcy. Others wanted to pay on their mortgages but couldn’t because there was no longer anywhere to send their payments when their lenders disappeared during the mortgage crisis a few years back.

Fast forward to years and even more than a decade later. These old liens have come alive again after being allegedly acquired by a professional debt buyer of defaulted debts.  This new industry, fueled by private equity, acquires defaulted debts for pennies on the dollar of what they claim is owed.  A 2013 study by the Federal Trade Commission reported that debt buyers paid as little as “4.0 cents per dollar of debt face value” claimed due.  So, if someone theoretically owes $100,000 on a zombie second mortgage, chances are when the new debt buyer acquired it, it paid in the range of $4,000 or less for the debt.  

Last year the Maryland Court of Special Appeals held that those debt buyers who acquire these zombie mortgages have no limit to collect on the liens by foreclosure.  Unlike every other party to civil litigation with strict time limits to collect by civil courts, the appellate court held that no limits exist for zombie debt buyers.  

While the Zombie debt buyers may have a theoretical right to foreclose that is subject to no time limits, they still have to comply with other laws, which can be difficult for them.  The debts are often assigned to debt buyers without any warranties or representations, which generally indicates some defect in the documentation preventing the claimed right to collect.  In other instances, the zombie debt buyers cut corners and do not hire bona fide collectors, or those they do hire cannot collect on the debt without acting unfairly and deceptively.  Federal and state collection laws govern these actors and require strict compliance.  In most cases, private equity firms do not seem to be eager to pay for regulatory compliance required to do business in the secondary mortgage market.  Instead, these players seek to flood consumers and courts in hopes that they will not be caught.

Several years ago, the Consumer Law Center helped get special legislation passed by the Maryland General Assembly to balance the playing field for victims of unfair and deceptive mortgage servicing practices. The legislation came about in response to Wells Fargo’s admission, years after the fact that it had foreclosed on hundreds of homeowners with no right to foreclose.  It had known about its errors for years but concealed them from the homeowners until its public disclosure and only after it had wrongfully taken the homes from these families.

Now, under Maryland law, the statute of limitations will not bar a homeowner or former homeowner from bringing unfair or deceptive conduct claims against a mortgage servicer years later.  Rather, servicers have a duty to disclose their errors, and the limitations generally do not run until three years after such disclosure.

Therefore, homeowners and former homeowners who have been victimized by private equity may have certain rights and protections under Maryland law.