Prepared Remarks of Director Rohit Chopra on Zombie Mortgage Debt
First, let me thank Brooklyn Law School, its faculty, students, and neighbors, for hosting us today, and thanks to you to everyone who has joined us to discuss mortgages and debt collection, including these zombie mortgages.
I really just want to thank and echo what Attorney General James said, and thank local officials, including Councilmember Joseph for joining us. And I want to give a thanks to all of you here.
In our panel discussion, we are going to hear from a lot of experts – people who have worked directly with homeowners and who know a lot about this. But let me just tell you I am quite bothered that over and over again we see how often the system is not working for homeowners. Instead of creating wealth for homeowners, we see bad actors figuring out ways to drain it.
The Foreclosure Crisis and Great Recession
Many of us remember vividly the foreclosure crisis, which was often discussed in terms of being in the southwest or southeast, but it was really in every neighborhood. In every state, we saw pockets of it. And it was really one of the greatest transfers of wealth, and it erased decades of progress closing the racial wealth gap.
Between 2006 and 2008, the number of foreclosure filings increased threefold from 700,000 to 2.3 million.1
By 2011, the foreclosure rate had climbed to nearly three times the foreclosure rate during the worst of the Great Depression.
And I think we cannot let amnesia get to us. We have to constantly remember that.
One-in-twelve households with a mortgage, 8.2 percent, were three months or more behind on their mortgage.
One-in-twenty families lost their homes, and many more saw the values of their homes plummet due to neighboring foreclosures. In other words, all of us, even those who can pay their mortgage have a vested interest in making sure their neighborhoods stay stable.
Local governments—from boroughs, towns, cities, and counties—all of them incurred trillions of dollars of expenses responding to the foreclosure crisis in addition to the precipitous drop in tax revenue. And that drop in tax revenue also had collateral impacts on so many people in our society.
In the years leading up to the foreclosure crisis, mortgage lenders ignored basic underwriting standards. From banking to lending, for thousands of years, people would only lend to you if they thought you could pay it back. But various financial innovation changed that.
Pricing of loans was decoupled from ability to repay. Lenders were using an originate-to-distribute business model that made them money by selling loans on the secondary market to third parties. This made lenders’ balance sheets indifferent as to whether the consumer could pay it back. In other words, lenders could profit handsomely off consumers they were setting up to fail.2
To increase profit and the number of loans they could bundle and sell, lenders push-marketed loans of increasing variety and complexity.
And as Attorney General James mentioned, one practice involved what were called 80/20 loans. Lenders replaced the usual mortgage insurance required for a mortgage at more than 80 percent of the home’s value by splitting the mortgage into two separate loans—one for 80 percent of the value and one for 20 percent of the value.
During the worst of the foreclosure crisis and Great Recession, when so many homeowners struggled to pay mortgages that had been sold to them with no regard for their ability to pay or even the value of the home, many holders of second mortgages went silent. They stopped communicating with borrowers who had fallen behind and sold off the loans to debt collectors for pennies on the dollar – writing the debt off their books and taking the loss.
Instead of pursuing what were essentially uncollectable debts – there was no money or value to go after – the debt collectors holding on to those second mortgages waited. And as the Attorney General mentioned, they were often purchased by debt buyers or other investment firms.
We got to that point not just because of lending and debt collection practices, but also because of earlier federal government inaction. One of the reasons the CFPB makes sure to hold hearings outside of Washington is because part of the reason we were created is that federal regulators, in the years leading up to the financial crisis, actually blocked and silenced state officials who were trying to do something.
Federal regulators issued weak guidance about “exotic” products and treated the spreading abuses as problems impacting only a marginal and unimportant part of the market. There was also a practice known as preemption where federal agencies hit delete on state laws and blocked state attorneys general and regulators from protecting homeowners in their own states. It was one of the big causes for the meltdown in so many jurisdictions.
Zombie Mortgages and Time-Barred Debt
In recent years, home prices have increased since the Great Recession, and many homeowners have got back on their feet. Some of this has been precarious, and people are wondering what is happening to them.
The CFPB has heard increasing reports of debt collectors trying to resurrect these expired second mortgages. These companies demand the outstanding balance on the second mortgage, grown now with ten or more years of silently accrued interest and fees, and these companies may be threatening foreclosure if the borrower does not pay up.
As an initial step, in response to the complaints we have heard and are analysis of the market, we are issuing legal guidance today to affirm debt collectors who are covered by the Fair Debt Collection Practices Act have some real standards they must adhere to.
We explain in our advisory opinion, that after a state’s statute of limitations expires and a debt becomes time barred, debt collectors subject to the Fair Debt Collection Practices Act cannot use or threaten to use judicial processes, such as foreclosure actions, to collect the debt, and, in most states, foreclosure actions are indeed subject to a statute of limitations – like here in New York.
This means that for many zombie mortgages, the statute of limitations has passed.
When covered debt collectors sue or threaten to sue to collect a time-barred debt, including threatening to bring a suit for foreclosure, they may be breaking the law. Debt collectors do not get to claim ignorance of the law or ignorance of the debt’s age – if the statute of limitations has expired, taking legal action, threatening suit or foreclosure, may be illegal, no matter what the debt collector claims to have known. This is the law.
We are looking for covered debt collectors who are breaking the law, and just like Attorney General James, we want to stop it. We will work closely with state enforcement agencies to go after offenders. People can also sue debt collectors under the Fair Debt Collection Practices Act themselves for this behavior.
We saw a lot of problems that lingered after the initial crash. While news of the stock market gets a lot of attention, homeowners – who often do not have a lot a power – their voices are suppressed. We saw this in the mortgaging servicer meltdown, we saw this in so much of the student loan borrower defaults, and we see it over and over again. I think what we have to do here is talk about it, and not just talk, but act.
With that, I want to turn to today’s panel. We are here today to delve deeper into the issue of mortgages and debt collection, including zombie mortgages.
I want to thank everyone again for joining our hearing, and I’m looking forward to the discussion.