AILSA CHANG, HOST:
Maybe you saw kids trick-or-treating last night dressed as zombies. Well, there is another kind of zombie that's much scarier. NPR's investigations team has been looking into what are called zombie second mortgages. These are loans taken out 20 years ago that homeowners thought were dead, but they rise from the grave when companies try to collect or foreclose. Now, Massachusetts is going after one of those companies and helping hundreds of homeowners. NPR's Chris Arnold reports.
CHRIS ARNOLD, BYLINE: A zombie is pretty scary, and so are these loans when they come back to life. People can lose their homes before they even really know what's going on.
ANDREA CAMPBELL: That's exactly right. It puts people's homes at risk, so it is scary.
ARNOLD: That's Massachusetts Attorney General Andrea Campbell. Her office investigated a company named Franklin Credit Management and found that it was allegedly violating state and federal law by trying to collect money that homeowners didn't actually owe. Before these loans were zombies, they started out as second mortgages that many people got when they bought a house back during the housing bubble. After the crash, many of the loans were basically worthless, and homeowners say they were told that the loans were resolved through loan modifications. But now that home prices have risen so much, some companies are claiming that the loans are still valid, and they're moving to collect.
CAMPBELL: If you look at zombie second mortgages, the process itself is unfair. You have folks who legitimately believe that they have paid a debt or that it has been done away with, and now you have a random company and random strangers coming back decades later to push them to pay something they haven't received a statement on, they knew nothing about, and are often blindsided.
ARNOLD: Now, Campbell's struck a settlement with Franklin Credit. Franklin declined an interview and, in a statement, denied the allegations and said it does not admit wrongdoing. But the AG's office says Franklin has agreed to change its business practices if it seeks to collect on mortgages in the state in the future, and it's agreed to stop all efforts to collect on its entire portfolio of mortgages for people in Massachusetts.
How many homeowners are being helped here?
CAMPBELL: Approximately 518 borrowers, which, of course, is sizable.
ARNOLD: Still, the settlement involves just one company in just one state. A recent NPR investigation looked across several states and found at least 10,000 zombie second mortgages with foreclosure activity. So there are still a lot of homeowners getting demands to pay these old zombie loans, and some of them have been losing their houses. Andrea Bopp Stark is an attorney with the National Consumer Law Center. She hopes this settlement by the AG in Massachusetts is just the beginning.
ANDREA BOPP STARK: I think it's groundbreaking. I think it's really hopeful, because it's kind of a roadmap for other states to use, not just against Franklin, but any debt buyer or lender who is engaging in this kind of conduct with zombie second mortgages.
ARNOLD: NPR's investigation in the state of Maryland uncovered the names of dozens of companies that were moving to foreclose on homes over these old zombie loans. The Maryland AG's office says it's received complaints about some of those companies. It won't comments on whether or not it's investigating. Both the Maryland and Massachusetts AGs encourage people to contact their offices if they feel debt collectors are trying to collect money that they don't actually owe.
Bopp Stark would like to see the federal government take more action - specifically, the Consumer Financial Protection Bureau. Rohit Chopra is the director of the bureau. He says he's aware of the problem of these old zombie loans.
ROHIT CHOPRA: Well, it's certainly something that freaks a lot of us out. We don't want to see some of the worst relics of the financial crisis come back to haunt people. And we're often worried that really old debt that may be invalid is being sold and resold and often threatening people when it comes to their financial lives.
ARNOLD: Bopp Stark says if the Bureau really is concerned about that, it could clarify exactly what the rules are with this old debt - for example, that debt collectors can't charge a mountain of retroactive interest on an old mortgage if a homeowner wasn't even receiving monthly statements for many years. She says that would be crucial to help homeowners fight off these zombie loans and debt collectors.
Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.
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