Wall Street Journal Aids Vulture Investors Threatening Second Mortgage Borrowers With Foreclosure….on (Nearly Always) Legally Unenforceable Debt

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The Wall Street Journal dutifully reports on yet another threat to the financial and mental health of homeowners who got too deeply in debt in the runup to the financial crisis….predatory investors trying to collect on “zombie” second mortgages and threatening foreclosure. Yet as we’ll soon explain, “zombie” is too generous a term. These mortgages are almost certainly all dead. But if borrowers don’t defend themselves, as with other forms of invalid debt, the predatory debt collector will prevail by getting a default judgment. And here, that means taking the house.

The Journal does its readers a disservice by not bothering to describe how shaky the legal ground on which these vultures operate is. The story instead limits itself to the bare facts of this phenomenon, except for a couple of easily-missed asides.

Let me give the tl;dr warning up top: if you or someone you know is on the receiving end on one of these shakedown operations, do not pay the extortionist a dime until you’ve spoken to a lawyer, or if you can’t afford one, a not-for-profit that specializes in lending/mortgage counseling. If you have a statute-of-limitations defense (and you almost certainly do), making a payment vitiates it.

As Bankrate warned in 2022:

Making a payment on an old debt, whether in full or part, revives it, essentially restarting the clock on old debt. Agreeing to pay: If you acknowledge that the debt is yours and agree to pay, the statute of limitations on your debt will start over.

As you will see, that is precisely what these second mortgage extortion artists are trying to do. And the bloody Journal dignifies it!

Many lenders simply gave up on underwater second mortgages a long time ago, even ceasing to bother to go to the effort to dun or even send statements to borrowers. That was because there was a big enough first mortgage that given housing prices, foreclosure costs, and first mortgage balances, there would be nothing left to go to a second mortgage.

But with the long march of time pushing up housing prices, and borrowers continuing to pay off second mortgages, the calculation has changed…..assuming hapless and easily cowed borrowers. From the Journal:

Homeowners around the country are facing large bills and even foreclosure threats from investors who own their second mortgages. The loans were often made more than a decade ago. High home prices have given the investors a new incentive to try to collect.

Many homeowners say they were unaware that their second mortgages still existed. Lenders often “charged off” these loans years ago, deeming them unlikely to be repaid after borrowers fell behind. Many homeowners stopped receiving monthly statements, giving them the impression that the mortgages had gone away.

They hadn’t. The lenders sold the second mortgages to other investors, sometimes for just pennies on the dollar. Now, some borrowers could lose their homes even though they have been consistently paying the bills they receive each month for their primary mortgages. Federal regulators have taken notice.

So far, so good. But then we get to the part that is rancid:

Investors both large and small are part of the ecosystem that makes mortgage lending work in the U.S. Some investors say their goal is to positively impact homeowners’ lives by helping them resolve past debt. They also say that borrowers are obligated to pay what they owe.

No, predators trying to prey on borrowers who in the overwhelming majority of cases do not owe them a dime is not even remotely part of the “system working”. Second mortgage getting an itty bitty recovery (the equivalent of nada in net present value terms as far as the original loan was concerned) will do absolutely nothing to promote new loans. This is just the equivalent of banks looking in the couch cushions and finding some loose change.

The problem is that these pillagers will nevertheless prevail unless borrowers resist. Note again that the article presents the homeowners who are on the receiving end as (understandably) shocked and dismayed, depicted these pillagers as generous in their efforts to extract more dough (by depicting it as a settlement) and does present one example of a pushback approach which the Journal presents as unlikely to work (as opposed to presenting others that should).

One thing judges understand is the statute of limitations. The article depicts most of these mortgage as not even having been billed, much the less paid, for years.

If period of non-payment is past the statute of limitations, the lender has no legal basis for trying to collect (unless the borrower is current on other loans with the same lender, which given that these raptors are niche players, seems highly unlikely). Justia provides a good overview:

A common procedural defense to a lender’s attempt to foreclose on a home involves the statute of limitations. This governs the time in which a lender can pursue a foreclosure after the homeowner stops making payments on their mortgage. If the lender violates the statute of limitations, the foreclosure action can be dismissed on that basis alone, even if the foreclosure otherwise would be valid. A state may have a specific statute of limitations for a foreclosure action, or it may be controlled by the statute of limitations for written contracts, since a mortgage is a type of contract. The statute of limitations lasts between three and six years in most states, although a few states have a longer time period.

The statute of limitations starts running when the homeowner stops making payments. This could mean that it starts when the homeowner makes the last payment before stopping or when the homeowner first misses a payment on the mortgage. Often, a lender will not take action immediately to pursue a homeowner for missing a payment on a loan. Since they handle a huge quantity of loans, they may not start the foreclosure process for years after the first missed payment. As a result, the statute of limitations can be especially relevant to a foreclosure case.

The statute of limitations for foreclosures varies by state, but it is usually between three and six years.

Raising the Statute of Limitations Defense

As the homeowner, you have the responsibility to raise the statute of limitations defense if it applies. The court will not review this issue on its own account. If you do not raise the defense, it will be considered waived, even if the lender violated the statute of limitations. The case will proceed forward on its merits unless you have other procedural defenses.

Some people may wonder whether delaying the foreclosure proceeding on other grounds can eventually trigger a statute of limitations defense. In some states, a foreclosure lawsuit may take years to resolve. However, the statute of limitations refers only to the time period before the lender starts the action. If it runs out while the litigation is still in progress, you cannot raise it as a valid defense.

Let’s contrast those considerations with the one of the timelines in the Journal piece:

Warren A. Brown was flummoxed when he got a notice last fall telling him that the Randallstown, Md., home he lives in was subject to foreclosure. The reason, he learned: failure to make payments on a home equity line of credit taken out in 2006.

Brown hadn’t known the second loan existed, he said. He moved into the house and started paying the primary mortgage in 2010. His brother, an architect who designed and owned the house, died in 2015, and the house is now owned by his estate.

“I had been paying a mortgage for 13 years,” Brown said, “and so I didn’t understand it at all.”

So Brown is presumably the executor of the estate or acting in cooperation with the executor. If the executor advertised that the brother died (which it may have done as a matter of prudence even if the estate was too small to be probated), the lender who acquired the second mortgage is on even shakier ground. For example as a pretty typical article giving high-level advice to executors in Maryland notes:

All states impose statutes of limitations on debts, meaning that after a certain amount of time passes from a debt’s due date, the courts can no longer require the debtor to repay the debt…

When someone dies, these statutory limitations are often both extended and shortened. They can be extended in that the expiration period is often put on hold for a few months, so that everyone has a chance to get organized and sort things out. This “hold” is officially called “tolling” the debt, but is not usually a major factor since statutory limits are measured in years.

However, statutory limits are also shortened in that almost all states have mechanisms for the estate to establish a time limit for claim submissions measured in months, not years, and these shortened limits overrule any statute of limitations (in other words, even if a statute of limitations implies that a debt would still be enforceable, it will not be enforceable if the estate limits have kicked in).

[Update] Because mortgage debt attaches to the house, it will likely survive the estate statute of limitations changes. However, the lender behavior in Maryland looks to be extremely irregular. Admittedly, I did only a quick gander, but the sites I consulted said mortgage lenders usually clear their throats pretty pronto when they learn a borrower has died as to what to do next. Some mortgages have a due on death clause, so they can force a sale (or alternatively some other action by the heirs or estate). So I would hazard that means we are back to the regular statute of limitations. In Maryland, that is 12 years, longer than in many states. Even in retrograde Alabama, it’s 10 years.

Ahem, the Journal sort of around to this idea, only in the 25th paragraph in a 35 paragraph piece:

The Consumer Financial Protection Bureau held a hearing on these second mortgages in April. The agency released guidance telling certain debt collectors that they can’t threaten judicial actions, such as foreclosures, for debts that are past a state’s statute of limitations.

“The CFPB is hearing increasing reports of debt collectors seeking to resurrect these expired second mortgages,” CFPB Director Rohit Chopra said at the hearing, where he referred to them as “zombie mortgages.”

Notice the Journal fails to mention, as Justia points out above, that borrowers can use expiration of statute of limitations as a defense and it’s usually a showstopper.

In addition, the Journal also fails to mention the interaction of first and second mortgages, which could lead to an additional defense here:

Around 2014, they [Luz and Orlando Mora] got a mortgage modification. Their first and second mortgages were from the same lender, and they thought the second mortgage was included in the modification. They stopped getting statements on the second mortgage years ago, Luz Mora said.

In 2021, the Moras received a letter from a mortgage servicer, Specialized Loan Servicing, that said their second mortgage was in default. In March 2022, the mortgage’s owner, Gulf Harbour Investments, filed a foreclosure lawsuit in state court in Florida’s Hillsborough County.

Remember the 2012 National Mortgage Settlement? The Journal is silent on who the original lenders were, but it was the biggest banks that dominated that market. We wrote regularly back in the day that the size those books, particularly at the very very wobbly Citigroup, were the reason the Administration was so unwilling to entertain the idea of principal modifications on first mortgages. They’d need to wipe out the seconds do so. Insta balance sheet black hole!

That settlement, which we called a “get out of jail for almost free” card, allowed for lenders and servicers to meet their obligations by paying a little in hard dollars and the rest in funny money, like mortgage modifications. The reason for that designation was that subprime mortgages were mainly owned by investors, so modifying them did not come at the original lenders’ expense.

By contrast, banks held on to most of the second mortgages they made. But if the banks knew they were deeply underwater and therefore would have to eventually be written off, it would often be preferable to make a chargeoff an a timely basis and use that as a National Mortgage Settlement credit rather than take the hit with no offsetting bennie later. And yes, a lot of credits for modifying second mortgage were issues. From the Los Angeles Times in 2014:

Five huge lenders that signed a landmark 2012 settlement over foreclosure abuses have completed their obligation to provide billions of dollars in relief to troubled borrowers, according to the former bank regulator assigned to monitor their compliance.

Joseph A. Smith Jr. said Tuesday that he has credited Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co., Citigroup Inc. and the so-called ResCap parties with a total of $20.7 billion in consumer relief. ResCap includes Ally Financial and GMAC Mortgage.

In their settlement with the federal government and 49 states, the banks had agreed to provide $20 billion in credited relief to consumers….

Some actions received less than 100 cents on the dollar credit, so the total relief delivered to distressed borrowers was about $50.4 billion, Smith reported….

…the settlement required that at least 30% of the relief be delivered by reducing the balances on first mortgages, and that category wound up amounting to 37% of relief.

The other categories were short sales and deeds in lieu of foreclosure, 31%; refinancing assistance, 17%; and second mortgage forgiveness, 15%.

That means that if any servicer sold a second mortgage to a vulture lender that it had charged off and used for credit in the National Mortgage Settlement, it defrauded the Feds and applicable state. I hope someone with either stature or standing brings this issue to the attention of the Consumer Financial Protection Bureau.

It would be one thing to see this sort of slant in say Reuters, which is very much oriented toward finance pros, or the mass market Associated Press, which often give only a simple story line on lending-related stories. But the Journal clearly could have done much better and didn’t.

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  1. jefemt

    The unresolved Mortgage Crisis post 2007-ish is why I have always maintained we never really ‘recovered’.
    So much of the bad debt is hidden from the books, never ‘best-practices’ resolved , extinguished, released, foreclosed. Balance sheets look so much better (sarc). Zombies.

    Back when I was a Mortgage lender for Wells Fargo (sigh) in the heady early 2000s up to the Lehman POP, we sold HELOCS as add-on fries with your burger.
    Many of these were never accessed, but seldom were they properly released.
    My super-hero alter ego is ‘title guy’… and it was brutally challenging obtaining Full Release and Satisfactions from Wells. I was a former employee, with the Pro Deal, knowledge of the byzantine service arms, and title knowledge. I feel for the typically naive, under-informed and reasonably uninterested average leveraged home owner. But to have greedy predetory vultures ‘capitalize’ on this- repugnant.

    Shame on Murdoch and the Gerbil! I detest that rag.

  2. ambrit

    I’m willing to wager that the Journal also did not give any links to third party sources of information that could be of use to ‘distressed’ borrowers.
    This looks very much like the gaslighting tactic of giving inadequate, but still somewhat useful “help” in order to distract readers from potentially more productive sources of help. Give just enough mediocre assistance so as to make it look like all useful assistance has been delivered. It is a massive misdirection that shows that this Casino also puts on a competent Magic Show to blind the customers when needed.
    The Mortgage Crisis never really went away.

  3. Kyle

    No talk of the families that were ruined through all of this – the amount of people whose lives were charged forever by greedy bankers who never saw any repercussions for their actions.

    Hell, my sister has struggled with drug addiction since 2010 and I can draw a line from the financial crisis to her addiction. But those type of things are never discussed in the open.

  4. lambert strether

    This post is a public service. Read it!!

    You may help someone you know or even yourself!

    1. ambrit

      This subject is too bloody depressing is my best guess as to why so few people replied to it. The reply, or lack thereof, to this by the Commenteriat can be ‘spun’ as a Zeitgeist Indicator.
      Serious question: Can NC arrange to have this ‘carried’ by ‘Fellow Traveler’ blogs? [The ins and outs of cross blog posts would make an interesting article itself.]
      As for our own ‘home folks’ crew not picking this up; many PMCs we deal with, as in family members with money, are too certain that they are “special” and thus immune from mortgage hi-jinks.

  5. Christian

    A mortgage is a secured claim not typically subject to the estate claims limitation period, and is not usually submitted as a claim on the estate. The mortgagee May foreclose on the debt in rem at any time irrespective of who owns the property at any given time. In many states, that limitation period is 21 years after the maturity date.

    1. Yves Smith Post author

      Making Shit Up is a violation of written site policies. You provide no links to support your assertion and it is contradicted by a quote in the post from a source highly regarded by attorneys.

      Justia above 100% disagrees with you on your assertion re the statute of limitations: “to foreclose on a home involves the statute of limitations” which is said in some states was subject to the general (contract) statute of limitations (6 years or less) and in some states, subject to a separate provision re mortgage loans.

      The CFPB also said that vultures should not be harassing borrowers where the statute of limitations on the mortgage has passed, suggesting this is a common if not prevalent practice.

      I agree I was not correct re the estate issue but am surprised that this mortgage did not have a due on death clause. The sites I have read also say that the lender typically informs the borrower of options of what the lender wants or will allow to happen, so the silence in the Maryland case of 8 years is extremely irregular, to put it politely.

      1. Christian

        I can speak about Ohio because that is where I hold an active law license. Here is a concise summary of the statute of limitations as it applies to mortgages: https://finneylawfirm.com/mortgagee-remedies-and-ohio-statute-of-limitations/
        Even if the personal obligation (i.e. the promissory note) is not collectible due to the limitation period expiring, the mortgagee may pursue an action in ejectment. In Ohio, the limitation period for an installment note doesn’t begin running until the last installment is due or the note is accelerated (R.C. 1303.06). I’m not going to do a 50-state survey on this issue, but Ohio is by no means an outlier when it comes to the law of collections.

        As for how death impacts a mortgage, the federal Garn-St. Germain Act prohibits a mortgagee from invoking the due-on-transfer clause against an heir who has inherited the mortgages property from a deceased borrower.



        A few months ago, a client faced a foreclosure suit from a zombie second mortgage. He stopped paying in 2006 when he declared bankruptcy. Now, after 18 years of no communication, they sue. Despite the absurdity of the situation, the law pans out in their favor, and believe me, we left no stone unturned.

  6. Tim

    I remember in 2010 trying to buy a short sale. I made my offer. The seller’s agent contacted me directly asking for a ceiling on my asking price to cover the lender of the second mortgage’s demand, so the deal wouldn’t fall through.

    I told the agent the the lender on the second is entitled to jack sh#$, and bailed on the offer. I guess I could have tried to proceed without the higher ceiling offer, and if they denied it sued them, but I was young and just trying to buy a place to live at the time. I ended up buying a nice home instead of the stopgap condo, so all ended well, but still. The definition of an evil company is one that preys on the ignorance of their customers.

  7. Keith Howard

    Thank you, Yves, for this highly informative piece. I’m going to forward it to the head of my Registered Neighborhood Organization (in Denver) as well as to my Councilwoman. I’ll jawbone them as strenuously as I can. In my old City neighborhood there are probably many long-time residents/owners who may find themselves in this predicament. Do you object to my trying to get it translated into Spanish?

  8. Diogenes

    Thanks, Yves.
    This saved me a minimum of $20k, with an upper bound of possibly $100k,
    on a 15% compounded rate over 14 years.
    It’s one of the reasons I read nc daily.

  9. Adam Eran

    This is the reason title companies exist. Make sure to use one in any real estate transfer! Even from an estate!

    Incidentally, burning an old mortgage is also a bad idea. In California you must record a “satisfaction” indicating it’s paid off. Ask your title company.

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