Zombie Mortgages

 

Rhonda L Duddy The term “zombie mortgage” originated from the aftermath of the financial crisis in 2008 when there was an increase in residential mortgage loans that defaulted.  In a typical scenario, the mortgage servicer would start the foreclosure process, but then stop all communication with the homeowner and not follow up because the servicer didn’t believe they would be able to recoup their investment, so it wasn’t worth their effort.  Because of the lack of communication, and other likely financial pressures, some homeowners may not have prioritized payment obligations or thought that their mortgage was forgiven or rolled in with a first mortgage during a refinance or other loan modification.  Unfortunately, that was not the case and that debt along with the encumbrance continued to exist.  After remaining silent for years, the mortgages then came back from the dead, so to speak, when the mortgage servicer resumed collection efforts or foreclosure processes were initiated and that is why these resurrected mortgages are sometimes referred to as “zombie mortgages.”    Although the term “zombie mortgage” has been around for years, you may have been hearing them mentioned more frequently lately.  That could be due to the $10 million dollar settlement that was reached last October between the Massachusetts Attorney General and Franklin Credit Management Corporation (Franklin Credit).  In addition to the settled Massachusetts case, articles have recently been published that discuss the reason for the increased interest in zombie mortgages.  For instance, a recent New York Times article stated that the latest focus on zombie mortgages is due to the rise in home prices.  The article stated that the median home sale price has hit another record high, but mortgage rates have declined.  Since a rise in property values increases equity, that increase could put a mortgage holder in a good financial position. Also, a recent NPR investigation analyzed foreclosure data in several states and found that in the past two years there were at least 10,000 second mortgages in New York alone whereupon foreclosure activity had been initiated for mortgages that were originated between 2004 to 2008.  Even the CFPB has defined the term in its consumer information page.  (https://www.consumerfinance.gov/ask-cfpb/what-is-a-zombie-second-mortgage-en-2133/) Clearly, some mortgage holders believe now is the time to take action in order to recoup their investments.    Massachusetts Attorney General Andrea Campbell recently released a statement that the settlement with Franklin Credit was the first of its kind in the Commonwealth.  According to the statement, the settlement resolves allegations that the company violated Massachusetts consumer protection laws by improperly attempting to collect on debts in its portfolio of primarily second mortgages after failing to communicate with borrowers as well as failing to comply with critical foreclosure-prevention measures in accordance with MGL c. 244, §35B. Section 35B prohibits a lender from publishing a notice of foreclosure sale with respect to “certain mortgage loans” without first having taken reasonable steps and made a good faith effort to avoid foreclosure.  The Attorney General claims that Franklin Credit severely delayed communicating with borrowers, including delaying sending required 35B notices, which prevented borrowers from obtaining assistance until their unpaid balance was too large to allow a successful modification of the loan. The Attorney General further alleged that when Franklin Credit did send the required 35B notices, it failed to take required steps to respond to and assist borrowers, and in some instances unlawfully charged up-front payments as a prerequisite to entering a modification, further impeding borrowers’ ability to cure or modify their mortgages. Under the settlement agreement, Franklin Credit will cease collecting and attempting to collect the debts of its entire Massachusetts mortgage loan portfolio. The company also will not transfer or sell any of these loans to another entity, effectively relieving the burden of over $10 million in debt for hundreds of Massachusetts borrowers. In addition, Franklin Credit will make a monetary payment of $300,000 to the Commonwealth and change its business practices to comply with state laws if it seeks to service any future mortgages in Massachusetts. Franklin Credit Management denied all of the allegations and stated that they are pleased to have resolved the matter and believe the settlement is in the best interests of the company.  To read Attorney General’s press release on the settlement, follow this link:  https://www.mass.gov/news/in-precedent-setting-settlement-ag-campbell-protects-homeowners-from-zombie-second-mortgages Rhonda Duddy is Massachusetts and New Hampshire Underwriting Counsel for Stewart Title Guaranty Company.  She is also a member of REBA’s Title Insurance and National Affairs Section.  Rhonda can be reached via email at rduddy@stewart.com