Pay Up Or Move Out: The Americans Losing Their Homes to ‘Zombie’ Mortgages

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1:50Bloomberg Audio Studios. Podcasts. Radio. News. Scott and Carrie Amable bought their first home in California's Contra Costa County in 2005, when their daughter was in junior high. It was in a perfect location. It was like two minutes from my parents' house from where I grew up. So that was super nice. It had three bedrooms. It was in a good school district. And it was$500 ,000. Like a lot of people at the time, they used two mortgages to afford this house. Noah Buhair is a data journalist on Bloomberg's investigative team. He says the first mortgage the Imobles took out was the bigger one. It covered about 85 % of the purchase price.

2:37And the second, smaller mortgage, covered about 15%. The Imobles lived in that house for the next 15 years. But then, in the spring of 2021, the doorbell rang. Scott Immobile answered his doorbell, and there was a gentleman standing there who informed him that this gentleman had bought his house and the Immobiles needed to move out. Their home had been sold at a foreclosure sale. They were just flat out in disbelief. The Immobiles didn't understand how this could have happened. They had been paying off their first mortgage for years. And while they'd refinanced their second mortgage to pay for some home repairs in 2006, they had declared bankruptcy a few years later and got a tax document from their lender indicating that that second loan had been canceled.

3:27But Noah says the debt came back to haunt them. They were surprised. They knew that this old second loan that they had taken out, that there was a debt collector trying to collect on it. For a variety of reasons, the debt collector thought that they were still owed this money. And not just the principal the immobiles had taken out, but a decade plus of back interest, which took their debt from about$98 ,000 to around$200 ,000. And they didn't have this money. The problem was, whatever the immobiles' tax documents said, their lender had never released the lien on their house. And because that lien was still on their house, the debt collection firm was able to proceed with a foreclosure and sell the house out from under them.

4:16It's a nightmare scenario. A debt collector comes calling saying an old loan you thought you could stop paying off has suddenly come due with interest. And Noah says similar scenarios are playing out all over the country. In the past few years, a whole industry has emerged to try to collect on old home loans that many homeowners had understood to be canceled or forgotten. Noah and his team got a trove of documents that gives new insights into how one of these debt collection investment firms operates, and how thousands of old second mortgages are now rearing their heads. What really struck me was just how these lending decisions two decades ago are still affecting people 20 years on.

5:05You know, I think a lot of the world has moved on from the 2008 financial crisis, but the lending decisions that were made back then are still affecting people. I'm Sarah Holder, and this is The Big Take from Bloomberg News. Today on the show, an investigation into the debt collection industry bringing zombie mortgages back to life.

5:35Noah Buhair, an investigative data reporter, has been tracking the debt collectors that are buying up a certain kind of secondary loan. Loans that have some sinister nicknames. Sleeper seconds or zombie mortgages. Generally, they are mortgages that folks took out in the run-up to the 2008 financial crisis. It was really common back then, for instance, for people to get one bigger loan and then a smaller junior loan that would obviate the need for them to have a down payment. As the housing bubble expanded, millions of Americans took out these second mortgages. But then, when the market crashed, many homeowners were underwater.

6:19Homeowners like Scott and Kerry Amable. Well, as the economy tanked, for me, business goes down. I'm in the automotive industry, so, you know, people hurt. They're trying to ride their cars out longer and not do the same amount of repairs in their car. Scott says, like a lot of families, they had to make tough decisions about which bills to prioritize. Well, we ultimately looked into what our options were, and I knew that the first mortgage was ultimately the key player in our home ownership, and the second was more or less a rider on the back of that. So we decided to keep with the first, not pay the second.

7:05Those secondary loans also became lower priority for many lenders. Because home prices had fallen so much during the financial crisis that in some cases, lenders figured they wouldn't be able to make their money back even if they took possession of the property and sold it. You had years in which lenders had no incentive to go after these loans. And what ultimately happened is that the banks, they stopped sending borrowers' statements. And in some cases, they even issued tax documents to borrowers saying that these loans were canceled. Those tax documents are known as 1099Cs. They mean a bank has written off a loan as a loss.

7:49The form even has the words cancellation of debt in boldface letters written on top. After falling behind on their second loan, the Amables filed for bankruptcy. And soon after, the bank sent them two of these 1099-Cs, one for Scott and one for Carrie. We received the 1099 from Flagstar. The cancellation of debt. We submitted it to the IRS, and I think that was it. I mean, I just assumed that that debt had been written off completely. The Immobles also stopped seeing the loan show up on their credit report. But Noah says none of that meant they were fully off the hook. Just because someone hasn't been getting statements doesn't necessarily mean they don't owe the money.

8:39So one of the big things that borrowers want to look for is that the lien that was placed on their property related to the mortgage was actually reconveyed or released. So in some cases, the bank is forgiving the loan, but they forget or they fail to clear the lien? Yeah, the missing step is that the lender needs to go to the county and record a document saying that the lien has been released. In the Immobilius case, the lien on their home hadn't been released. And what they didn't realize was that their lender, Flagstar, had sold their debt to a debt collection firm in 2016. Flagstar declined to comment.

9:19When debt collectors came calling, the Immobiles just kept sending them that tax document. Well, we eventually started getting notices from different servicing companies on the second mortgage that they were pursuing for payment. And my wife submitted, you know, the 1099. And then maybe a year later, a year and a half later, I get a new statement from a different company. And we submit the same letter with the 1099 and same process. Lenders and debt collectors have argued, and courts have upheld this in many cases, that those cancellation of debts, those IRS forms, are administrative files. The lenders are required to send them out in certain circumstances.

10:09And they don't always cover a borrower's bases and represent that the loan has been fully forgiven. The Amobles told NOAA their initial approach to these debt servicing companies worked for years. But as the housing market recovered and home values rose, that changed. So things bottomed out in the housing market nationally in around 2012. By 2016 nationally, home prices had reached their pre-crisis peak. So if you're the owner of one of these old second mortgages, after about 2016, you're looking at home values and realizing, if I foreclose, there's money there in the actual underlying asset. This realization has led to the rise of an entire industry of investment firms who focus on buying up these second mortgages.

11:04And one of those firms, the one that bought the Amable's mortgage, is called ARCPE. ARC PE, you know, bills itself as an asset management firm. They are real estate investors. But what they spent a lot of time doing over the past decade was buying up portfolios of residential mortgages. And a lot of them were these old second mortgages. Noah and his colleagues got access to nearly a million ARC PE internal company documents from Distributed Denial of Secrets, a nonprofit journalism organization, also known as DDoS. DDoS receives and archives leaked and hacked information in the public interest.

11:48Bloomberg verified the information, cross-checking it against data provided by Adam Data Solutions, a real estate data company that collects public ownership and transaction records for properties nationwide. And they also spoke with experts, homeowners, and people with knowledge of ARCPE's operations. Those documents and that reporting gave them an unprecedented inside view into how ARCPE works. They tended to buy these in pools of loans, a couple hundred here or maybe a thousand there. And over time, they were able to accumulate this portfolio of several thousand second lien mortgages from before the crisis.

12:30After buying the loans, the company's next step was figuring out which loans would be best to collect on and when. They hired underwriters to basically comb through all the history on these loans. And they really scrutinized this stuff in a very systematic way because their returns were going to be better if they could pinpoint which loans were best to pursue. And then they had to figure out a way to get people to pay. They use third parties in many cases, like servicing firms and law firms around the country that would help them send these demand letters and threats of foreclosure. Sometimes ARCPE did move to foreclose, like with the Amables.

13:18But often these threats were just that, threats. ARCPE just used the possibility of foreclosure to get borrowers to start paying back their debts. Or their debts plus interest. And Noah says that's how a lot of these firms tend to operate. Oftentimes the resolution on these is that a borrower negotiates a discounted payoff. Now, what the borrower doesn't know in that case, and what this trove of data from ARC really reveals, is that the debt investors are often making out really handsomely, even if they don't get the full amount that they're requesting. And that's because in many, many cases, they're able to buy these old loans for 10 cents or less on the dollar.

14:04Noah and his team looked at about 850 old second mortgages that ARCPE had received some form of resolution on. About three quarters of those were profitable. Noah spoke with ARCPE's managing partner, David Gordon, about the company's approach. He told us in no uncertain terms that ARCPE follows the law. Well, a debt is a debt. People borrow this money. They have a contractual obligation to pay the money back. And in the majority of cases, which the data backs up, they try to reach a resolution before foreclosing on people. It's actually not in their best interest to take people's homes. ARCPE is only one of many debt collection companies pursuing zombie second mortgages in the U.S.

14:51and the potential scale of the zombie mortgage problem is much larger. Bloomberg analyzed property records across the U.S. and found that more than 600 ,000 second mortgages issued in the years before the financial crisis could still come back to haunt borrowers. Now, in the scheme of the broader mortgage market, like a couple hundred thousand loans is actually not that huge. But when you get down to the level of individual borrowers and understand how much this upends people's lives, it's really rather staggering. When we come back, the rules and regulations that govern the zombie mortgage debt collection industry and how the regulatory landscape is changing under the second Trump administration.

15:47Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real, lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at Vanguard.com slash audio.

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17:43Hey, everyone. It's Emily Simpson and Shane Simpson from the Legally Brunette podcast. Each week, we're bringing you true crime through a legal lens. Whether you want all the facts on the disappearance of Nancy Guthrie, or you still need to wrap your head around the ditty verdict, we're breaking it all down step by step. And we're not just lawyers. We're also husband and wife. It makes for some pretty entertaining episodes. Listen to Legally Brunette on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts.

18:18Bloomberg's Noah Buhair has been closely tracking firms like ARCPE, firms that buy old home loans and try to collect on them. He says while there are some state and federal laws that apply to their practices, the protections are a patchwork. So every state is going to have rules and regulations around how long after a debt comes due that a creditor can seek repayment. On top of that, we have several federal laws that come to bear on zombie mortgage collection. The two biggest are the Truth in Lending Act and the Fair Debt Collection Practices Act. And both of those have things to say about whether back interest can be assessed during periods when borrowers weren't getting statements and the kind of tactics that debt collectors can use to get people to pay money back.

19:15And the regulations surrounding both of those laws are incredibly complex and an area of significant dispute between the debt collection industry and consumer advocates. How effective are these laws at protecting homeowners from predatory tactics? Well, I think what our investigation shows is that they're riddled with holes and that people are paying sums that they likely don't go. People oftentimes have trouble fighting these collections efforts because the laws are so complicated. And the average person has trouble unpacking all the different moving parts and mounting the best defense. And hiring a lawyer to help mount that defense can be expensive.

20:05For people like Carrie and Scott Amable, it was prohibitively expensive. We contacted an attorney to try and help us with the situation, and he was willing to, but we couldn't afford to. Noah says a few years ago, the federal government started taking a closer look at the zombie debt collection industry. That scrutiny came from the Consumer Financial Protection Bureau, the agency created in the aftermath of the financial crisis, to make sure that Americans received fair treatment from banks, lenders, and other financial companies. What we were able to learn in our investigation is that the CFPB was working on three investigations into servicing companies that sought to help investors collect on these old zombie mortgages.

20:55The CFPB had also sought details from eight firms on the scale of their work with zombie mortgages, according to three people familiar with CFPB's operations and agency records Bloomberg reviewed. ARC-PE was not among the companies under scrutiny. Then, in February 2025, the Trump administration gutted the CFPB. What our sources have told us is that those investigations, all work on them, basically halted. A spokesperson for the CFPB told Bloomberg the work has not been abandoned, but declined to elaborate. Great. What kind of preemptive steps do experts say homeowners could or should take to find out if they might be liable for a zombie mortgage?

21:41Yeah, I think one of the clearest and earliest steps that people should take is just figure out if there are any outstanding liens on their property. How do you do that? Most counties have, if you go to the clerk recorder's website, they'll have these records online. In some places, it's a little harder and you actually got to go to the physical office. But I think the more actionable and important advice is people should not ignore these demands when they get them. They should seek out expert advice quickly because often time is of the essence. If a foreclosure sale actually goes through, consumer advocates say it's a lot harder for borrowers to unwind that situation than it would be if they were negotiating and asking for information before a foreclosure has gone through.

22:31So look up your property records, find out if you have any outstanding liens. If a debt collector comes knocking, lawyer up. Not necessarily even lawyer up, because I think a lot of people might hear that and be like, oh, I don't have money for a lawyer. Well, two things I would say to that is, one, There are legal aid clinics around the U.S. certainly work on a lot of these cases with lower-income borrowers. The other thing is that there are housing counselors out there, folks who aren't necessarily trained as lawyers, but still have a background in this that could help people wade through the thicket.

23:07The Amables didn't end up getting help from a lawyer. ARCPE moved to foreclose, and soon after the new owner of their home rang the doorbell, they moved out. They couldn't afford a new mortgage, so they dipped into their retirement savings, bought an RV, and moved into an RV park about an hour away from their old home. You know, my dad got ill. He has since passed. He passed on June 11th. But he was at hospice at home. And, you know, had I been in my home, I was three minutes away from the house. I could get back and forth real quick. I could be there and help out more. Versus being an hour or more away.

23:50An hour or more, yeah. You know, it just, it limited, it changed things a lot for us.

24:03This is The Big Take from Bloomberg News. I'm Sarah Holder. To get more from The Big Take and unlimited access to all of Bloomberg.com, subscribe today at Bloomberg.com slash podcast offer. If you liked this episode, make sure to follow and review The Big Take wherever you listen to podcasts. It helps people find the show. Thanks for listening. We'll be back tomorrow.

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