As debt collectors surely seek at least partial repayment of millions of dollars in unpaid home loans, some say renewed financial stresses on tens of thousands of local consumers could dampen economic recovery.
SACRAMENTO, Calif. — Homeowners defaulting on mortgages today may be surprised to learn years from now that they still owe thousands of dollars — and a collection agency is coming after them to get it.
That’s because lenders have been quietly selling second mortgages and home-equity lines left unpaid after foreclosures and short sales. The buyers: collection agencies, which in some states have years to make a claim.
If they win court judgments, these collectors could have years to pursue borrowers with repayment plans, and even garnish their wages, said Scott CoBen, a Sacramento bankruptcy attorney.
“The only relief a consumer will have is entering into a debt-negotiating plan or filing for bankruptcy,” said Sylvia Alayon, a vice president with the New York-based Consumer Mortgage Audit Center. The firm provides mortgage analysis to lenders, advocacy groups and attorneys.
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The phenomenon suggests an ominous, looming echo of today’s real-estate meltdown. As debt collectors seek at least partial repayment of millions of dollars in unpaid home loans, some say renewed financial stresses on tens of thousands of consumers could dampen economic recovery.
“I think there will be a lot of unhappy people when it hits,” said CoBen. “We saw this in the ’90s. This is not really new. Just when you think you’re back on your feet, you’re making money and the economy’s good, they hit you with this.”
Alayon said most people are so stressed out and exhausted by trying to save their homes today that they are unaware they could face another hit later. And many who are losing homes don’t get the advice necessary to prevent future fallout, say nonprofit loan counselors.
“You’ve got tens of thousands of people in California who have this hanging over their heads who don’t even know it,” said Scott Thompson, principal at for-profit Mortgage Resolution Services in Carmichael, Calif. He fears a new wave of bankruptcies might flatten people just starting to recover from losing their homes.
“So many of these are people with 750 or 800 credit scores who made a bad decision,” said Thompson. “Or they’re people who suffered income cuts. These are people, in terms of the economy, whom we need to participate.”
But an entire industry is gearing up to buy their debt at deep discounts and collect what they can, Alayon said.
“It’s a big business and investors are coming out of the woodwork. It’s a very lucrative business,” she said. Real-estate insiders and financial players know it as “scratch and dent.”
One of the biggest players in the business, Texas-based Real Time Resolutions, did not respond to an inquiry on the subject from McClatchy Newspapers. Neither did Bank of America, which holds many defaulted loans made by its Countrywide affiliate during the real-estate boom.
Borrowers may be vulnerable in years ahead — generally, those who defaulted not only on their first mortgage but also on a home-equity loan or second mortgage.
In California, banks can’t collect from borrowers for primary, so-called “first-lien” loans that go unpaid. When a house is foreclosed or sold through a short sale, the lender of the first loan gets the house back or the proceeds from another buyer.
But banks also made thousands of “second-lien” loans, including those used to finance 20 percent down payments during the housing boom.
A separate category of “seconds” includes home-equity loans and home-equity lines of credit. Nationally, about 3.4 percent of those loans are currently delinquent, according to Foresight.
Owners are generally, but not always, on the hook for the second loans left over from a foreclosure or short sale. Most investor mortgages, too, leave the borrower liable for potential unpaid debt.
In many short sales, experienced real-estate agents or attorneys can negotiate away debt obligations for the second-lien loan. But many inexperienced borrowers don’t know that and sign final-hour agreements giving lenders the right to pursue them later.
“Seek advice,” counseled Doug Robinson, spokesman for national nonprofit mortgage counselor NeighborWorks America. He said nonprofit counselors can help.
“Often when you work with a real-estate agent, they’re not really equipped to handle the repercussions. They’re set up to make the sale,” he said.
Government forces are already moving to limit potential damage to millions now struggling with home loans. A new Obama administration short-sale program aims to prevent banks that hold second-lien loans from pursuing collections from homeowners after their short sales. It went into effect April 5 and works this way: Sellers will receive notice that their servicer has steered part of the sales proceeds to secondary lien holders “in exchange for release and full satisfaction of their liens.”
This release would apply only to short sales done through the administration’s Home Affordable Foreclosure Alternatives program.