Americans are losing their homes to zombie mortgages

Scott and Kari Amable lost their three-bedroom house to foreclosure in 2021 because they couldn’t come up with the roughly US$200,000 (S$259,000) that a debt collector said they owed on a second mortgage. It was a shocking amount–more than double the US$98,000 they had borrowed.

It also shocked them for another reason: their original lender had sent them tax documents more than a decade earlier saying their debt had been cancelled.

Their story is far from unique, as a growing number of debt collectors across the US specialise in buying a certain type of loan, often referred to as a “zombie” mortgage, which have lain dormant for years.

Borrowers took them out before the Great Recession, and after home prices crashed, these loans became all but worthless. But as we show on this episode of Bloomberg Investigates, the market eventually came roaring back, and with it a cottage industry looking to bring these loans back to life.

While these companies often brand themselves as investors, their main business is debt collection.

They buy old second mortgages from banks and other financial institutions, then hire law firms and vendors known as servicers that demand people pay unexpectedly high balances or risk losing their homes.

To understand the scope of the zombie second mortgage problem, Bloomberg analysed property records across the US and found that more than 600,000 second mortgages issued in the years before the financial crisis could still be a threat to borrowers.

But inaction by most state lawmakers and federal regulators has left borrowers with little defense against debt collectors. Bloomberg Investigates reveals the high price some homeowners are paying as a result. BLOOMBERG