Mar012013

Zombie debt collectors are gorging on former loan owners

For people who purchased properties in California, a non-recourse state, and never refinanced, lenders cannot come after them seeking to recoup their losses on a foreclosure. For those who live in recourse states, or California loanowners who refinanced, the situation is quite different. Lenders still have the right to pursue these borrowers for the deficiency. Most borrowers walked away thinking the debt was extinguished. While it was detached from the property, borrowers are still legally liable for any shortfall on the lender’s books.

Lenders haven’t done much to collect on these old debts so far. Most lenders reason that they couldn’t get blood from a turnip, so they have been biding their time waiting for debtors to become solvent again and save some money that they can go after. Lenders are increasingly selling these bad loans to zombie debt collectors who are pursuing these former owners to see what they can get. Former owners aren’t too happy.

Zombie foreclosures: Borrowers hit with debts that won’t die

By Les Christie @CNNMoney February 20, 2013: 9:17 AM ET

Borrowers are discovering that their foreclosed homes are coming back to haunt them –long after they have moved out.

In these so-called zombie foreclosures, borrowers move out of their homes aftertheir bank schedules a foreclosure auction only to find out months or years later that the auction never took place or the bank never transferred the deed to the house. That means the borrower still technically owns the home, leaving themon the hook for property taxes, fees and for homeowners’ association dues. …

See: Sometimes real estate is a ball and chain.

Mustapha Sesay, a 45 year-old father of two, thought he had lost his Brandywine, Md., home in 2008. But two years later, a debt collector called telling him he owed $70,000.The holder of his second mortgage had never forgiven his debt — even though the lender holding his primary mortgage had foreclosed on the home.

Typically the second mortgage holder is out of luck if there isn’t enough cash from the foreclosure sale to pay off both the first and second lien, said Cheryl Cassell, director of the housing counselor network for the National Community Reinvestment Coalition. But, depending on state law, second mortgage holders can sue homeowners to pay off the notes — even after they lose the home in a foreclosure or the lender can sell the debt to a collection agencies.

In California it’s called the One Action Rule. An extinguished second mortgage still has the right to pursue an action against the former owner. If they didn’t call the foreclosure, and no underwater second would, they haven’t exercised their one action. Most don’t so they can preserve their right to go after the borrower for the shortfall.

In Sesay’s case, the debt collector callsevery week or two. He has had little luck stopping it. “I talk to credit counselors, lawyers,” he said.

Sesay would have been well on the way to credit score recovery. But now, he said, “I could move to Alaska in winter and no one would lend me ice.”

He doesn’t recognize his good fortune. This is his chance to break the cycle of debt dependency and learn to rely on his own savings instead.

Bill Purdy, a real estate attorney in Soquel, Calif., said borrowers can’t always trust lenders to file foreclosure paperwork properly. In November 2011, when his client Christopher Warner’s Felton, Calif., home was auctioned off, his mortgage debt was fully extinguished — standard practice based on California law.

Warner’s lender, however, recorded $120,000 on its books as debt –the difference between what he owed and what the house sold for — and gave it to a collection agency. The debt has lowered Warner’s credit score by an additional 100 points, he estimated.

“It nearly put me into bankruptcy,” he said.

In most other states, he would have been required to pay back the $120,000 debt and bankruptcy would have been his only option.

He has hired Purdy to get the debt collectors off his back.

In a $25 billion settlement with the state attorneys general last spring, the nation’s five largest mortgage lenders agreed to inform borrowers of any decision to forgo or delay a foreclosure. But victim’s attorneys said the banks have not been careful about following that policy.

I doubt many squatters have gotten letters telling them they can keep squatting for a while.

There is nothing wrong with bankruptcy as a borrower option. One of the functions of bankruptcy is to prevent lenders from going to far with their efforts to enslave the population. The threat of bankruptcy or perhaps the fear of it, compels lenders to toe the line. Borrowers should look at bankruptcy as an opportunity to start over released from the bondages of debt.

Banks will continue to pursue these bad debts, particularly now that people are starting to save and acquire assets again. Zombie debt collection will be a growth area for the next several years.