Homeowners
Homeowners across America face foreclosure threats as forgotten second mortgages resurface with decades of interest. (PHOTO: Roger Starnes Sr/Unsplash)

A US Army engineer who had not heard about his second mortgage in nearly 15 years discovered that debt collectors were demanding more than double what he originally borrowed.

Shawn Murphy took out a $75,000 (£56,000) second mortgage on his Los Angeles duplex in 2005, according to Bloomberg. After declaring bankruptcy in 2010, he believed the debt had been discharged. However, when he looked into refinancing options to help pay for his sister's cancer treatment, he found a lien on his property demanding $159,355 (£119,140).

According to Bloomberg, Murphy is among millions of Americans blindsided by what experts call 'zombie second mortgages' — dormant loans from the pre-2008 housing bubble that debt collectors have revived, often with decades of accumulated interest.

The Scale of the Crisis

More than 9 million second mortgages were taken out between 2004 and 2008, according to federal data analysed by Bloomberg. An estimated 600,000 of these loans remain active threats to homeowners, representing potential liabilities exceeding $32 billion (£24 billion).

When the housing market collapsed, these junior loans became almost impossible to collect. Lenders either modified the terms, cancelled them outright, or simply ceased pursuing repayment. But as property values recovered, debt buyers purchased these dormant mortgages for a fraction of their original value and began demanding full repayment, including years of back interest.

Patricia McCoy, a law professor at Boston College who helped establish the Consumer Financial Protection Bureau (CFPB), told Bloomberg that the crisis stems from the incomplete resolution of the 2008 catastrophe.

'Even after all the efforts by government and industry to reduce needless foreclosures, the potential for zombie second mortgages remained unresolved,' McCoy said.

Families Left Defenceless

The human toll extends far beyond Murphy's case.

Outside Chicago, Raul Esparza, a father of seven, faced demands for nearly $30,000 (£22,400) to settle a second mortgage he said he had not heard about in 15 years, which was initially about $10,000 (£7,476). Near San Francisco, Jose Rivas returned home to find a foreclosure notice on his door over a $121,000 (£90,466) loan that his lender had sent a tax document cancelling in 2009.

In Virginia, Danielle and Roy Brown received a demand for more than $86,000 (£64,300) in back interest on a loan for which they had not received statements in nearly a decade.

Bloomberg's analysis found that zombie debt collectors were three times more likely to initiate foreclosures than other creditors after taking over old second mortgages.

Lack of Federal Protection

The timing could not be worse for affected homeowners. The Trump administration has significantly weakened the CFPB, the agency Congress created after 2008 specifically to enforce mortgage consumer-protection laws.

Investigators within the CFPB had been building cases against at least three companies involved in zombie mortgage collections before acting director Russell Vought ordered supervision to cease. Vought has since announced plans to shut the agency entirely within months.

Senator Elizabeth Warren, the Massachusetts Democrat who helped establish the CFPB, has launched an investigation into whether banks received credit for cancelling mortgages under settlement agreements and then sold those same debts to collectors, according to the Boston Globe.

'Americans are being tricked and trapped by zombie mortgages,' Warren stated. 'The CFPB should be protecting Americans from these scams, but instead, Donald Trump and his administration are abandoning homeowners.'

Only four states have enacted legislation addressing zombie mortgage abuses, leaving most borrowers to defend themselves.

What Homeowners Can Do

Legal experts recommend gathering all relevant documentation, including tax forms showing debt cancellation, and consulting a consumer-protection attorney. Courts have often sided with borrowers who produce evidence that collectors violated federal laws requiring regular statements.

Murphy, now 58, was never able to help with his sister's medical bills. She passed away last year. His duplex, valued at over $1 million (£747,500) according to Zillow — cited by Bloomberg — remains encumbered by a debt he believed was erased nearly 15 years ago.

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