Zombie Loans Try to Feast on Chicago Home Equity

Just when Chicago homeowners thought the ghosts of the 2008 financial crash were buried, a new nightmare is clawing its way to the surface: zombie mortgages.

They’re haunting local borrowers who spent the last decade assuming their underwater second mortgages and home equity lines of credit from the pre-Great Recession era were either forgiven or wiped out during rounds of legal settlements. But those long-silent liens were never officially killed. Instead, major lenders quietly peddled the toxic paper for pennies on the dollar to opportunistic debt buyers.

Now, Crain’s reports local attorneys are finding those debt buyers increasingly headed to foreclosure court in the Chicago area. They are seeking repayment with years in interest, or the house keys from property owners who have enjoyed strong appreciation since the pandemic.

With the Midwest currently leading the nation in home price growth, Chicago property owners finally sit on a cushion of equity, but vulture funds are descending on unsuspecting residents across the metro area. They’re being hit by massive bills bloated with over 15 years of retroactive interest and obscure penalties, according to the outlet. Lenders’ ultimate leverage? Pay up, or face a foreclosure auction.

About 600,000 pre-2008 second mortgages, many of which were obscured by loan modifications during the economic recovery, remained unpaid nationwide, Bloomberg reported last year. In the cases where they’ve remained outstanding without being officially settled, debt buyers are paying attention once again as home equity rises, proliferating so-called “zombie mortgage” lawsuits across the U.S.

Lawyers Dan Edelman and Damon Ritenhouse told Crain’s they are fighting against these attempts to foreclose around Chicagoland. One of their main tools is the The Truth in Lending Act requirement for creditors to bill regularly and to disclose any changes in terms. So in the many cases when the lenders haven’t been issuing bills, the attorneys argue foreclosure isn’t an option.

The loans “went dormant because there was no equity in the properties,” Andrea Bopp Stark, senior attorney with the National Consumer Law Center, based in Boston, told the outlet. “Now they’re coming out of the woodwork.”

Neighborhoods that were historically hollowed out during the Great Recession are now prime hunting grounds for these resurrected defaults.

The aggressive shakedowns have drawn regulatory heat. The Consumer Financial Protection Bureau and federal lawmakers have probed whether banks double-dipped by selling off supposedly “forgiven” debt to third-party sharks.

— Sam Lounsberry