ROMAN MARS: This is 99% Invisible. I’m Roman Mars. Today, we’re bringing you a story about something that wasn’t thought about for years–something that thousands pushed out of their minds–that they were told they didn’t have to worry about, only to have it come back to haunt them.
It’s a story from our friends at Planet Money. It’s a podcast about economics–possibly the biggest thing that we all collectively try not to think about, only to have it greet us at the grocery store, at the gas station, even in our homes. And this episode does a really great job of illustrating how massive forces pull at the economy like tides and create ripple effects in our lives. I’m a huge fan of this podcast. And if you don’t already listen, I highly recommend you do. This episode is one of our favorites, brought to you by reporters Chris Arnold and Robert Smith.
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NARRATOR: This is Planet Money from NPR.
CHRIS ARNOLD: One spring morning a couple years ago, Karen McDonough was having her tea at her dining room table. She lives in a cute, little two-bedroom place in Quincy, Massachusetts. She looks out her window to the neighborhood beyond, and she sees something unusual.
KAREN MCDONOUGH: There were like 20 cars, and they all came at the same time. And they parked, like, in front of my house, across the street, up the street, and down this street. I just had this feeling like something really bad had happened.
ROBERT SMITH: She was right. Something bad was definitely happening–to her.
KAREN MCDONOUGH: And then I saw people get out, and then they were, like, coming to my lawn. And I’m like, “Why is everybody at my house?”
ROBERT SMITH: Karen puts on her shoes–goes out to the driveway. At this point, a group of men are milling around the lawn, casually dressed, except for one guy, who seems to be in charge.
KAREN MCDONOUGH: There was somebody. I think he might’ve had a uniform on or something, and he had a piece of paper. And I said, “What’s happening?” And he goes, “We’re selling your house.” And I’m like, “What are you talking about?” He goes, “Don’t pretend that you don’t know what I’m talking about.” And I go, “I actually don’t know what you’re talking about.” And he’s like, “Well, we sent you information.” And, um, it was like a foreclosure sale on my home.
CHRIS ARNOLD: This made no sense. Karen had been in the house for 17 years. She’s a registered nurse, makes a good living, and raised two kids here. And she was current on her mortgage.
ROBERT SMITH: Sure, there were a few bumps along the way. A long time ago, during the great financial crisis, she had asked for a modification of her mortgage. That was perfectly normal back then–it lowered her payments. But now these men on the lawn were telling her, “This is a foreclosure. You are going to lose this house.”
CHRIS ARNOLD: Karen is thinking, “This has to be some kinda scam, right? I mean, maybe they’re trying to rattle me?” She doesn’t know what to do, so she gets in her car.
KAREN MCDONOUGH: I almost didn’t feel safe. I didn’t know what they were doing. And I said to the people, “I’m backing up.” I said, “Get out of my way.” And I just left.
ROBERT SMITH: For months, Karen had been getting mysterious phone calls from strangers demanding money–men insisting that they had dug up some long lost debt she owed. It seemed so sketchy, like some sort of con game. But the men on her lawn seemed pretty real.
CHRIS ARNOLD: She eventually finds herself at a beach outside Boston.
CHRIS ARNOLD: And was it just like you drove to the beach and, like, lookED out at the water? And you’re like, “What the hell is going on?”
KAREN MCDONOUGH: Yeah I was, like, shaken–just, like, really overwhelmed. I was crying. It just didn’t make any sense. I’m a mother and I’m a nurse and I’m being evicted from my house that I’ve been making monthly payments on and that I’m current with.
ROBERT SMITH: By the time she made it back to her house, it was all over. The strangers on her lawn had sold the house out from under her.
ROBERT SMITH: Hello, and welcome to Planet Money. I’m Robert Smith.
CHRIS ARNOLD: And I’m Chris Arnold. We’ve been looking into Karen’s case for months now, and what we found was much scarier than some scam.
ROBERT SMITH: Karen was right. She’d been paying her mortgage every month for years. This whole drama was about old debt–debt that hadn’t been heard from in more than a decade–debt that everyone had told her was gone and forgotten.
CHRIS ARNOLD: Our investigation revealed that thousands of other people are getting the same calls and facing the exact same sort of nightmare as Karen–people who took out loans about 20 years ago, many say they were told the loans had been forgiven, but now the debt collectors come calling anyway.
ROBERT SMITH: They are known as zombie mortgages–zombies–because they can stay buried for years and then reach out and grab you.
CHRIS ARNOLD: And take everything! Today on the show, why are all of these old debts coming back to life right now? Is it legal? And is there any way to stop the zombies?
SALLY HELM: Hello, 99PI listeners. It’s Sally Helm here from Planet Money. When you’re done with this episode, we invite you to check some others we’ve done recently. There’s The Dark Side of Rooftop Solar, about why putting solar panels on your house can end up a bad deal when it shouldn’t. Or What is Temu Anyway? And another–What is With All The Tiny Soda Cans? about the surge in so many very precise smaller sizes in the grocery store, like travel size, party size, fun size, kid size… Is it sneaky inflation? We get to the bottom of it and tackle more serious questions, too. Check out the Planet Money podcast feed. And let us know what you think.
ROBERT SMITH: Karen remembers the first time she saw her future home– the little yellow cottagey house in Quincy, Massachusetts. It was 2005. She had just gotten divorced and was living in a small apartment nearby with her two sons.
KAREN MCDONOUGH: I saw this house. I really liked it. I thought the size was kind of charming. You know, it had a little yard. I thought it would be perfect because it was just the three of us.
CHRIS ARNOLD: Back then, a lot of people wanted to buy houses. The housing bubble was filling with steam.
KAREN MCDONOUGH: I had a friend, and she was a realtor. And, at the time, she was telling me that you could buy a home right now–that it was a good time to buy a home.
ROBERT SMITH: And here’s how most people do it. To purchase a house you put down 10%–sometimes it’s 20%–in cash as a down payment. And then you borrow the rest of the money as a mortgage.
CHRIS ARNOLD: Karen had a well-paying job as a nurse at Massachusetts General Hospital. Modest savings. But the house was $365,000, and she didn’t have tens of thousands of dollars for a down payment.
ROBERT SMITH: But during the housing bubble, Wall Street and banks wanted more people to buy houses. So, they came up with all kinds of ways to do that. And one was a system to get rid of the down payment. Instead of giving you just one mortgage, they would give two mortgages, two loans — and that second mortgage would basically cover the down payment. They used to say, “No down payment, no problem!” Just take a second mortgage.
CHRIS ARNOLD: And it was called a second because if something happened to the homeowner and they had to foreclose on the house, the big mortgage–the first mortgage–would be first in line to get their money back. The second mortgage would be second in line.
ROBERT SMITH: It takes longer to explain all this than it took for Karen McDonough to actually get one.
KAREN MCDONOUGH: Oh, it was the easiest thing I’ve ever applied for. I just filled out paperwork and submitted it, and it was approved.
CHRIS ARNOLD: It was $292,000 for the first mortgage and $73,000 for the second.
ROBERT SMITH: The two-bedroom cottage is hers. And she makes one of the great parental sacrifices for her sons…
KAREN MCDONOUGH: I gave them the master room. [laughs] My room I gave them because they shared that room. And then I took the smaller room. But it was good. It’s all good.
ROBERT SMITH: And then, as Karen sleeps in her tiny bedroom, the world just goes crazy. The housing bubble collapses, and the great financial crisis begins. We were both reporters then, Chris.
CHRIS ARNOLD: Yeah, we covered this together, sometimes, Robert. And it was pretty intense, right? I mean, 2008–Lehman Brothers collapses. Banks were going under. The leaders of countries were scared. You know, it was on the news every night. And while that was going on, a lot of people were losing their homes.
ROBERT SMITH: And as we all looked into it, we discovered it was those easy mortgages. They had this time bomb in them. The time bomb was that the interest rates were adjustable.
CHRIS ARNOLD: I saw this destroy people. I mean, honestly, it, like, shook my faith in the banking system that anybody would make these loans in the first place. Like, people would be chugging along, paying their mortgage that they could afford. But after just a couple of years, the loans were set to adjust way up.
ROBERT SMITH: Yeah, and when you say “way up,” we mean, like, $700 more a month–$1,000 more a month. I mean, millions of people could not pay their mortgages. They were foreclosed upon and eventually had their houses taken away from them.
CHRIS ARNOLD: And it was so many people that the government had to get involved. President Obama at the time– I mean his name was on the program just because that many people needed help; there had to be this national intervention.
ROBERT SMITH: Yeah, they were called Obama Loan Modifications. And they sorta pushed down the interest rates, essentially allowing people to stay in the place they were living.
CHRIS ARNOLD: Yeah, and I remember I talked to people who would say, like, “President Obama fixed my mortgage.” And I didn’t really have the heart to tell them, like, “Well, it probably wasn’t the president himself who was moving papers around and fixing your mortgage.”
ROBERT SMITH: So, Karen eventually got one of these loan modifications for her big mortgage–her first mortgage–which was just a huge relief for her. But you may be thinking, “Ehhh, what about the second mortgage–the one she had taken out for the down payment?”
CHRIS ARNOLD: This is the crucial question that will eventually lead to those men standing on her front lawn. As Karen remembers it, her mortgage company told her that that second mortgage was forgiven.
KAREN MCDONOUGH: 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. And I just didn’t question any of it because I was so grateful that the loan was modified.
ROBERT SMITH: And to be clear, there wasn’t any reason to question it. The same company had given her both mortgages. And now a representative for that company handling both mortgages was saying, “Hey, don’t worry about the second.”
CHRIS ARNOLD: And sure enough, she used to get two bills in the mail for the two mortgages. And, after a while she just got one bill in the mail for her first mortgage. And that seemed to settle it, right? I mean, this thing must be dead.
ROBERT SMITH: Years go by–a decade. Karen keeps going to work at Massachusetts General. She keeps paying her first mortgage. Her sons grow up. You can still see the pencil marks on the kitchen wall.
KAREN MCDONOUGH: If you look at this, you can see, like, this is them growing up and, like, their height. And we always did that.
CHRIS ARNOLD: They got tall, right? That’s, uh, six something.
KAREN MCDONOUGH: Yeah, they are tall. They’re both tall.
CHRIS ARNOLD: In 2020, though, she gets a letter. It’s from a company she never heard of: First American National. It sounds like a bank, but it sure isn’t her bank or even one that she’s ever heard of. And the letter says, “You owe us money.”
KAREN MCDONOUGH: It had an amount, and they wanted, like, a payment. And I think the amount was, like, 77,000. So, I was kind of, like, shocked. I was kind of in disbelief.
ROBERT SMITH: She thinks it can’t be about her mortgage. She’s been paying that every month to another company. So, she calls the phone number on the letter.
KAREN MCDONOUGH: I’m like, “Are you the lawyer that’s sending this information to me?” And he was like, “Yeah.” And then I was like, “Well, why are you doing this?” And he goes, “Well, why do you think I’m doing this?” So he never answered me the way that I thought a professional lawyer would. So, I just thought right away it was fraud.
ROBERT SMITH: She decides to ignore it. But soon it becomes impossible to ignore. There are more phone calls–demanding different amounts of money–threatening to foreclose on her house if she doesn’t pay up.
CHRIS ARNOLD: Karen starts to piece together that these calls are about that second mortgage that she had so long ago–the one that she’d been told was forgiven. So she calls up her first mortgage company.
KAREN MCDONOUGH: I was crying on the phone with them, having a nervous breakdown.
CHRIS ARNOLD: And she says they told her, “You know what? This is probably fraud.”
KAREN MCDONOUGH: And they kept saying like, “We’re gonna help you. You can’t lose your home through this..”
ROBERT SMITH: “You can’t lose your home through this.” That seemed logical. If someone official says a loan is forgiven, then it must be forgiven, right? If no one sends you a statement for a decade, they can’t just call you up out of the blue and demand money. Can they?
CHRIS ARNOLD: We called lawyers and advocates all over the country–government officials. They’d heard of stories like Karen’s–anecdotal stories about people losing their homes or being forced to sell them to pay the debt collectors–but nobody seemed to know the scale of the problem.
ROBERT SMITH: In fact, one top federal official told us, “If you find out, let us know.”
CHRIS ARNOLD: Yeah. [chuckles] So, we kept digging–filed Freedom of Information requests… In just one state, the state of Maryland, we found at least 500 people facing foreclosure from what appear to be long dormant zombie second mortgages just like Karen’s.
ROBERT SMITH: And when we looked across several states, we found at least 10,000 people who have old second mortgages from the housing bubble, where now a company is taking the very first step toward foreclosure.
CHRIS ARNOLD: Our investigation also uncovered databases with the names of the companies that own these mortgages and that are trying to foreclose on people. There was First American National, the people who Karen had said were calling her and answering her questions with more questions.
ROBERT SMITH: And companies with more cryptic names like BCMB1 Trust, FirstKey LLC, and A-R-C Private Equity. We tried to reach out to these companies, but a lot of these are LLCs registered in Delaware, which makes it extremely difficult to figure out who exactly owns them.
CHRIS ARNOLD: But A-R-C Private Equity popped up on LinkedIn. The co-founder, a guy named David Gordon, was wishing everybody a happy new year and asking if they happened to have any old mortgages that they wanted to sell.
ROBERT SMITH: Which, as everyone knows, is the traditional Wall Street way to celebrate the new year. So, we called David up to have him explain, “Why is this happening now? Why is all this old zombie debt coming back to life?” He was happy to talk to us.
ROBERT SMITH: Hey, how’s it going?
DAVID GORDON: Good, how are you, Chris and Robert?
CHRIS ARNOLD: Excellent!
DAVID GORDON: Which one’s which?
ROBERT SMITH: We do get that a lot.
CHRIS ARNOLD: David is part of a whole ecosystem of people that buy and sell mortgages. And generally speaking, having a lot of investors pouring money into home loans makes them cheaper and easier to get. David occupies a particular niche in all this. He’s buying up bad debt.
ROBERT SMITH: Now, David doesn’t own Karen’s old mortgage. But he’s bought a lot of old mortgages just like hers, sent letters asking for money, and sometimes threatened foreclosure–not him personally, of course. He uses a debt collection firm.
DAVID GORDON: I’m not looking to take anybody’s home. I want to make that clear. But, you know, an investor deserves to make their money back. And there is real money at stake.
ROBERT SMITH: The zombie mortgage problem was created during the run-up to the financial crisis of 2008. David was there watching it firsthand. He was at Morgan Stanley, buying and selling mortgages like Karen’s, putting them into bundles, and then selling them off as mortgage bonds.
CHRIS ARNOLD: And then people started to default on their mortgages. And Morgan Stanley was on the brink of going under. He expected to be laid off any day.
DAVID GORDON: We were playing literally putt putt golf on a trading desk for about six weeks. We all knew it was going to happen. It was a matter of when.
CHRIS ARNOLD: The mortgage industry was wrecked. Many of the loans they made–close to worthless.
DAVID GORDON: We went from being rock stars to, all of a sudden, being frozen on the desk. You know, Wall Street loves you one day–hates you the next day.
ROBERT SMITH: And fires you the day after that. David was suddenly unemployed. But he noticed something. All those mortgages he had helped package up into securities and sell for Morgan Stanley–they were on fire-sale. The bank was a sinking ship, and they were throwing bundles of dodgy mortgages overboard–mortgage bonds–good ones in with the bad.
DAVID GORDON: You know, I’m looking at some of these bonds that were traded that we helped create. And that’s when I had the aha moment. There’s a great opportunity to have a good business.
CHRIS ARNOLD: The business is to buy these bundles of mortgages for sometimes pennies on the dollar. Sure, some of them were worthless. The people who borrowed the money would never pay it back. But other mortgages might be worth something if you’re willing to wait.
ROBERT SMITH: And wait they did. David and others like him bought up thousands of these mortgages.
CHRIS ARNOLD: We asked him about Karen, though. She had modified her first mortgage. And she says she had been told explicitly that she didn’t need to worry about that second mortgage.
ROBERT SMITH: David says he hears this all the time. People think they had their loans canceled. Maybe sometimes they were even told their loans were gone. But in many cases, he says…
DAVID GORDON: They still exist. It’s not like they went away. [chuckle] And I think people were waiting on the sidelines to collect on those at some points.
CHRIS ARNOLD: And that’s why so many zombie mortgages are all coming back to life right now. Something big has changed in the real estate market that is causing debt collectors to come off the sidelines. And that is home prices.
ROBERT SMITH: This is the fascinating thing about first and second mortgages. As we mentioned before, it’s like the two mortgages are waiting in line to get paid back, right? If a house is sold or foreclosed upon, the first mortgage takes all the money. And anything left over goes to the second.
CHRIS ARNOLD: So when home prices tanked and the housing market crashed back in 2008, the second mortgages seemed worthless. If you foreclosed and sold the house — you wouldn’t even get enough money to cover Mortgage #1. So, there’s nothing left for Mortgage #2.
ROBERT SMITH: But if you bought second mortgages and waited on the sidelines for housing prices to go up, all of a sudden the sad, old second mortgage might be worth something. The house would be worth enough money that people like David could show up and say, “Ahem… Time to pay back that long-forgotten debt.”
CHRIS ARNOLD: This is what was happening to Karen. The house she bought for $365,000 in 2005 is now worth more than $600,000.
ROBERT SMITH: And home prices have risen massively all over the country. And as that’s happened, more people like David have been buying up the old second mortgages and sending those letters. These zombie mortgages have been opening their cold dead eyes and finally coming to life.
CHRIS ARNOLD: Now, David tells us he’s reasonable. He follows the rules. He’ll negotiate with the homeowners–even lower the amount that he says that they owe just a bit sometimes.
DAVID GORDON: And we’re trying to work with our borrowers. Nine times out of ten, we’re working with our borrowers. And most of those borrowers have been open to that.
CHRIS ARNOLD: But he says, “Look, if you borrow money, you have to pay it back. You are sitting on a very expensive home. And this debt helped pay for that–helped you buy that home. And if somebody doesn’t pay or doesn’t respond, he does foreclose on houses.”
DAVID GORDON: Nothing is free in this world. And if you signed up for a loan, you know what you signed up for. It blows my– You know, it is what it is.
ROBERT SMITH: “It is what it is.” “You know what you signed up for.” Sure. But, in Karen’s case, she believed that what she had signed up for had changed–that the second mortgage was forgiven.
CHRIS ARNOLD: When we last left Karen’s story, back in Quincy, Massachusetts, she was just starting to get those phone calls that felt like a scam.
ROBERT SMITH: And these debt collector guys–they weren’t just asking for the original $73,000 she borrowed. The numbers kept changing with different calls and different letters.
KAREN MCDONOUGH: Like, all of a sudden, “Here’s a 73,000– No, it’s 77– No. Oh, actually it’s 112,000.”
CHRIS ARNOLD: One document says they were trying to collect two and half times what she had originally borrowed–$184,000.
ROBERT SMITH: She calls her first mortgage company again. It’s called PHH. These are the people she pays every month–the ones she says told her it was probably a scam and to ignore the letters.
KAREN MCDONOUGH: They told me not to talk to them. PHH told me not to talk to them anymore–don’t give them any information, hang up on them, and don’t talk to them. So then I stopped talking to them.
CHRIS ARNOLD: This would turn out to be exactly the wrong thing to do. We reached out to PHH, and they said they have not been able to find any record of giving Karen this advice or even that they told Karen her loan was forgiven in the first place.
ROBERT SMITH: In 2021, that mysterious company–First American National–started foreclosure action on Karen’s home. They did the usual legal things. They sent her letters–took out ads in a local newspaper. They eventually sent the guy in the uniform to stand on her front lawn that spring day.
CHRIS ARNOLD: While Karen was sitting at the beach, wondering what was happening, they auctioned off her home. And the winning bidder ended up being that same company–First American National. Her house is now worth more than $600,000. They bought it for $180,000.
ROBERT SMITH: A few weeks later, Karen got an orange eviction notice posted on her front door.
KAREN MCDONOUGH: And I saw the orange thing. And then it said, like, “You have, like, 72 hours to get out.”
CHRIS ARNOLD: This is July 1st. It was a Friday.
KAREN MCDONOUGH: They did it on a Friday, so the 72 hours… Because Monday was the holiday, I’m like, “I have–”
ROBERT SMITH: This is the 4th of July.
KAREN MCDONOUGH: 4th of July weekend. So, I couldn’t get any legal help, even though I was trying to. So, for those three days–72 hours–I didn’t sleep. And I just started packing everything.
ROBERT SMITH: You actually started to pack?
KAREN MCDONOUGH: Yeah, I was crying for three days straight. I just packed.
ROBERT SMITH: And you’re calling lawyers?
KAREN MCDONOUGH: Yeah.
CHRIS ARNOLD: Most of the lawyers say, “Look it’s too late. I mean, lady, your house is sold. There’s nothing we can do.” But she does find one group of legal aid lawyers–a team that agrees to take a look at the case. They tell her, “Look, whatever you do, don’t leave that house. Stop packing. Don’t move out. We’re going to fight this.”
ROBERT SMITH: After the break…
ROMAN MARS: More from Planet Money after the break…
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SALLY HELM: Okay. One more pitch for exploring the Planet Money archives, just for you 99PI listeners. It’s called Summer Camp Capitalism. It’s about a camp where 12-year-olds do this in-depth simulation of an actual economy.
12-YEAR-OLD: Dang you, child labor laws!
SALLY HELM: There’s heartache and everything else that comes with being a pre-teen–but also a big question about capitalism versus socialism by the end of it. Find it in the Planet Money podcast feed, and let us know what you think. Alright. Back to the tale of zombie mortgages…
ROBERT SMITH: I’ve seen a lot of zombie movies. I’m kind of an expert. And the whole thing about zombies is that, once they come back to life, they are relentless. You can cower in your home, but they just keep coming. And there are thousands of them.
CHRIS ARNOLD: And that’s pretty much what’s been happening with zombie mortgages. It’s not just Karen. There are thousands of people waking up and finding that their whole life is threatened.
ROBERT SMITH: And just like with zombies, hiding in your house and hoping it will be okay does not work. You have to fight back.
KRISTI KELLY: There are lawyers and there are people out there who are willing to help you because it is not right. You should not lose your home.
CHRIS ARNOLD: Kristi Kelly has a consumer law firm in Fairfax, Virginia. She’s not Karen’s lawyer, but she’s represented a lot of people who are in basically the same situation.
ROBERT SMITH: Kristi started out doing legal aid work during the housing crash 15 years ago. And, like most of us, she thought this whole housing bubble debacle was over and done with–ancient history–until a few years ago. She began to get calls from people who were getting these threatening letters about old second mortgages.
KRISTI KELLY: You know, you see, like, a lot of scams as a consumer lawyer. And I thought, “This can’t be right. There must be something going on.” And then I realized that… [laughs] This is not an error, it’s a new trend.
CHRIS ARNOLD: Kristi calls the debt collectors and asks for the records on the loans. And what she sees is actually really ugly. Some of the loans have no documentation–no payment history. The record-keeping was terrible.
ROBERT SMITH: And Kristi was especially shocked by how cheap these mortgages are bought and sold for. Remember, these companies are calling up homeowners and demanding tens of thousands of dollars. But sometimes these debt collectors have purchased that debt for almost nothing.
KRISTI KELLY: We have a case where a portfolio of approximately 9,000 loans was sold for $6,000. And so, each loan was sold for less than a dollar.
CHRIS ARNOLD: Sometimes the loan sold for more–could be 10 or 20,000 dollars even for a loan–but, in this case, it’s conceivable that a company could purchase a loan for pennies. And even though it’s called a second mortgage, they can and do push ahead and take your home and get, say, 100,000 dollars or more without the first mortgage even knowing about it.
KRISTI KELLY: People don’t understand–even very sophisticated people do not understand–that a second mortgage company can foreclose if you do not do something to stop it. And they can take everything from you. And it is just so wrong that this is happening.
ROBERT SMITH: It may be wrong, but is it illegal? Kristi starts looking for things she can present to a judge and get these foreclosures stopped. She pours through federal and state laws, previous court cases… There’s lots of precedent about first mortgages and foreclosures. But this whole situation with second mortgages people thought were long dead–that’s new.
KRISTI KELLY: You know, that was, like, another panic. There’s no protections. You know, my client thought their loan had been canceled or forgiven, but there’s no database of, like, all the loans that are canceled or forgiven so you can go and verify it.
CHRIS ARNOLD: So, it’s hard to prove that the loan was canceled. But Kristi notices something that the debt collectors might have overlooked–a huge thing, actually, that they had either missed or ignored in the regulations–something that she thinks she might be able to fight them on.
ROBERT SMITH: We told you about how the debt collectors have added years and years worth of interest and late fees to the debt, sometimes doubling the size of the loan. Federal regulations say you can do that–but here’s the catch. You have to send monthly statements, like the ones you get for credit cards and student debt.
KRISTI KELLY: Regulation Z–which is part of the Truth in Lending Act–it requires monthly statements be sent if there is interest assessed on a mortgage.
ROBERT SMITH: Did you say Regulation Z?
KRISTI KELLY: Yes.
ROBERT SMITH: Z Like zombie?
KRISTI KELLY: Yes, exactly like zombie.
CHRIS ARNOLD: I love it. Fighting zombies with zombies. Regulation Z.
ROBERT SMITH: Kristi now had her legal crossbow to take on the zombie mortgages. In court, she can now ask these debt-collectors: [Columbo impression] “Oh, um, one more thing… Before you foreclose on this home and take away everything from this person,. show me the ten years worth of statements, please. I want to see every month–every statement with every missed payment–every dime of interest.”
CHRIS ARNOLD: But she says, “A lot of the time, that just never happened.” The homeowners hadn’t been getting any statements for years. And then, the companies would pile on a massive amount of interest and late fees retroactively.
KRISTI KELLY: In some ways, the greed of these second mortgage holders has given people leverage in their cases because it’s just not good enough to collect the value of the note. And they wanna go and get every last dollar and take every dime of equity. They then open themselves up to serious legal consequences and provide consumers the leverage they need to stay in their homes.
CHRIS ARNOLD: As a lawyer, Kristi can say, “Gotcha! You violated Regulation Z on sending statements, so your claim against my client is completely bogus.”
ROBERT SMITH: This is just one strategy, but Kristi has used it 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.
CHRIS ARNOLD: Still, she’s just one lawyer, basically in a lifeboat,trying to pull in all the people she can to rescue them–but knowing that there must be thousands more out there who need help.
ROBERT SMITH: Among them: Karen McDonough, back in Quincy, Massachusetts.
CHRIS ARNOLD: Hey Karen.
KAREN MCDONOUGH: How are ya?
CHRIS ARNOLD: Good. Good to see you again.
KAREN MCDONOUGH: You too.
CHRIS ARNOLD: Despite everything that has happened, Karen is still in her little yellow house.
ROBERT SMITH: We sat down with her in her living room, and she explained what had happened over the last few years. She got a team of lawyers. She stopped packing her boxes and did not move out. The eviction proceedings are on hold while they argue the case in court.
CHRIS ARNOLD: First American National legally owns the place. But Karen’s still paying her mortgage every month. So, she’s living in this kind of limbo.
KAREN MCDONOUGH: I feel like what happened was a terrible thing. But I’m still, like, really hopeful that I’m gonna stay in my home. I’m really hopeful I’m gonna win this case.
ROBERT SMITH: We’ll have to wait and see. At one point, these zombie seconds were real loans. And in some cases, the debt collectors have a legitimate claim to collect or foreclose on people’s homes. In other cases, they don’t–they haven’t followed a bunch of rules. Where all that stands with Karen’s case is still playing out.
CHRIS ARNOLD: Karen’s lawyers have now been piecing together what happened to that second mortgage over the past 12 years. And it’s kind of amazing, really. She spent ten minutes signing a mortgage, and then it took on a life of its own that she never knew about.
ROBERT SMITH: Karen has filed a lawsuit that lays out the story we just heard–that she was allegedly told the second mortgage was forgiven, that she didn’t get statements, and that she was told the debt-collection was probably fraud. Her lawyers are arguing that the mortgage should have been resolved a decade ago.
CHRIS ARNOLD: Instead, when her lawyers tracked her second mortgage, they found that it got passed from company to company. And it eventually was sold in a huge batch of about 600 other mortgages in 2020 to an LLC apparently connected to First American National, which her lawsuit alleges used unfair and deceptive practices to foreclose on her house.
ROBERT SMITH: And who exactly is this First American National? Despite a name that sounds like a bank, it is no bank–far from it. It appears to be a small outfit run by a guy named Ira Bailey out of New Jersey. He didn’t agree to an interview with us, but he said in email he’s been doing this for 21 years. And in a court document, the company disputed Karen’s description of their interactions–denied any allegations of wrongdoing.
CHRIS ARNOLD: And check this out. Once Karen’s lawyers looked into First American National, they found something else. A state banking regulator had sanctioned the company for operating as an unlicensed debt collector. First American didn’t admit wrongdoing, but it was fined by the state and ordered to stop. Karen’s lawyers allege that it then foreclosed on Karen’s house anyway in violation of that agreement.
KAREN MCDONOUGH: I’m not really clear, like, why these people were able to foreclose when they weren’t even supposed to be practicing in the state because of their history of what they’ve been doing.
CHRIS ARNOLD: Buying a home is the biggest financial decision that most people ever make–hundreds of thousands of dollars in a loan backed by the place that we live and sleep every night. That’s why, after the housing bubble collapsed, the government worked really hard to keep people in their homes and also to try to fix the system.
ROBERT SMITH: New laws were passed. Mortgages were modified. And everyone moved on. But now we’re seeing that there’s one more thing that hasn’t been fixed.
CHRIS ARNOLD: And that’s that people like Karen–the survivors of that financial crisis, who managed to keep their homes 15 years ago–those same people’s homes are now being threatened all over again.
ROBERT SMITH: Thousands of them! And what can you do as a homeowner like Karen other than fight it in court, beg your public officials to do something, and just try to keep your life together?
ROBERT SMITH: I noticed when I came in, like, your yard is clean. You have a basket of, like, lovely, purple flowers.
KAREN MCDONOUGH: Pansies.
ROBERT SMITH: Pansies? Is that what they are?
KAREN MCDONOUGH: Yeah.
ROBERT SMITH: But you don’t technically own this house anymore.
KAREN MCDONOUGH: It’s still my house. Like, it’s on principle. I’m still making payments. Yeah. I don’t–
ROBERT SMITH: You’re still cleaning the yard, you’re still mowing the lawn…
KAREN MCDONOUGH: Yeah, it’s still my home.
ROMAN MARS: That was Chris Arnold and Robert Smith. For more on this story, they have a digital piece with further reporting on zombie mortgages from NPR’s Investigations Team. You can find it at npr.org/zombie. This episode was produced by Sam Yellowhorse Kesler and edited by Jess Jiang with help from Bob Little. 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.
And, if you haven’t already subscribed to Planet Money, I highly recommend you do. A lot of their episodes really dig into some of the stuff we love talking about on 99PI–the unseen forces that shape our world. There’s an episode about why one company has a sort of monopoly on colors in the design world–or why flying in a plane feels like it’s way worse than it was half a century ago–or why soda cans seem to be getting smaller and smaller. It’s a great listen if you want to better understand the world around you. Subscribe to Planet Money wherever you get your podcasts.
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