Tag: Home equity loans

Home equity is near a record high. Tapping it may be tricky due to high interest rate

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Home equity is near all-time highs. But tapping it may be tough due to high interest rates, according to financial advisors.

Total home equity for U.S. mortgage holders rose to more than $17 trillion in Q1 2024, just shy of the record set in Q3 2023, according to new data from CoreLogic.

Average equity per borrower increased by $28,000 — to about $305,000 total — from a year earlier, according to CoreLogic. That’s up almost 70% from $182,000 before the Covid-19 pandemic, said chief economist Selma Hepp.

About 60% of homeowners have a mortgage. Their equity equals the home’s value minus outstanding debt. Total home equity for U.S. homeowners with and without a mortgage totals $34 trillion.

The jump in home equity is largely due to a runup in home prices, Hepp said.

Many people also refinanced their mortgage earlier in the pandemic when interest rates were “really, really low,” perhaps allowing them to pay down their debt faster, she said.

“For the people who owned their homes at least four or five years ago, on paper they’re feeling fat and happy,” said Lee Baker, founder, owner and president of Apex Financial Services in Atlanta.

Baker, a certified financial planner and a member of CNBC’s Advisor Council, and other financial advisors said accessing that wealth is complicated by high borrowing costs, however.

“Some options that may have been attractive two years ago are not attractive now because interest rates have increased so much,” said CFP Kamila Elliott, co-founder of Collective Wealth Partners and also a member of CNBC’s Advisor Council.

That said, there may be some instances in which it makes sense, advisors said. Here are a few options.

Home equity line of credit

Grace Cary | Moment | Getty Images

A home equity line of credit, or HELOC, is typically the most common way to tap housing wealth, Hepp said.

A HELOC lets homeowners borrow against their home equity, generally for a set term. Borrowers pay interest on the outstanding balance.

The average HELOC has a 9.2% interest rate, according to Bankrate data as of June 6. Rates are variable, meaning they can change unlike with fixed-rate debt. (Homeowners can also consider a home equity loan, which generally carry fixed rates.)

For comparison, rates on a 30-year fixed-rate mortgage are around 7%, according to Freddie Mac.

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While HELOC rates are high compared to the typical mortgage, they are much lower than credit-card rates, Elliott said. Credit-card holders with an account balance have an average interest rate of about 23%, according to Federal Reserve data.

Borrowers can generally tap up to 85% of their home value (minus outstanding debt), according to Bank of America.

Homeowners can leverage a HELOC to pay off their outstanding high-interest credit-card debt, Elliott said. However, they must have a “very targeted plan” to pay off the HELOC as soon as possible, ideally within a year or two, she added.

For the people who owned their homes at least four or five years ago, on paper they’re feeling fat and happy.

Lee Baker

certified financial planner

In other words, don’t just make the minimum monthly debt payment — which might be tempting because those minimum payments would likely be lower than a credit card, she said.

Similarly, homeowners who need to make home repairs (or improvements) can tap a HELOC instead of using a credit card, Elliott explained. There may be an added benefit for doing so: Those who itemize their taxes may be able to deduct their loan interest on their tax returns, she added.

Reverse mortgage

A reverse mortgage is a way for older Americans to tap their home equity.

Like a HELOC, a reverse mortgage is a loan against your home equity. However, borrowers don’t pay down the loan each month: The balance grows over time with accrued interest and fees.

A reverse mortgage is likely best for people who have much of their wealth tied up in their home, advisors said.

“If you were late getting the ball rolling on retirement [savings], it’s another potential source of retirement income,” Baker said.

A home equity conversion mortgage (HECM) is the most common type of reverse mortgage, according to the Consumer Financial Protection Bureau. It’s available to homeowners who are 62 and older.

$Here's how to get an ultra low mortgage$

A reverse mortgage is available as a lump sum, line of credit or monthly installment. It’s a non-recourse loan: If you take steps like paying property taxes and maintenance expenses, and using the home as your primary residence, you can stay in the house as long as you like.

Borrowers can generally tap up to 60% of their home equity.

The homeowners or their heirs will eventually have to pay back the loan, usually by selling the home, according to the CFPB.

While reverse mortgages generally leave less of an inheritance for heirs, that shouldn’t necessarily be considered a financial loss for them: Absent a reverse mortgage, those heirs may have been paying out of pocket to help subsidize the borrower’s retirement income anyway, Elliott said.

Sell your home

Alexander Spatari | Moment | Getty Images

Historically, the biggest advantage of having home equity was amassing more money to put into a future home, Hepp said.

“That’s historically how people have been able to move up in the housing ladder,” she said.

But homeowners carrying a low fixed-rate mortgage may feel locked into their current home due to the relatively high rates that would accompany a new loan for a new house.

Moving and downsizing remains an option but “that math doesn’t really work in their favor,” Baker said.

“Not only has their home gone up in value, but so has everything else in the general vicinity,” he added. “If you’re trying to find something new, you can’t do a whole lot with it.”

Cash-out refi

A cash-out refinance is another option, though should be considered more of a last resort, Elliott said.

“I don’t know anyone right now who’s recommending a cash-out refi,” she said.

A cash-out refi replaces your existing mortgage with a new, larger one. The borrower would pocket the difference as a lump sum.

To give a simple example: let’s say a borrower has a home worth $500,000 and an outstanding $300,000 mortgage. They might refinance for a $400,000 mortgage and receive the $100,000 difference as cash.

Of course, they’d likely be refinancing at a higher interest rate, meaning their monthly payments would likely be much higher than their existing mortgage, Elliott said.

“Really crunch the numbers,” Baker said of homeowners’ options. “Because you’re encumbering the roof over your head. And that can be a precarious situation.”

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June 10, 2024
The US could give homeowners a $980 billion stimulus at no additional cost, ‘Oracle of Wall Street’ says
PM Images/Getty Images
- A housing proposal could unlock nearly $1 trillion for homeowners, Meredith Whitney wrote for the FT.
- The idea is for Freddie Mac to start purchasing secondary mortgages, offering a cost-effective way for borrowers to tap equity.
- Homeowners face few options to do this, as there aren’t many willing buyers.
An idea is percolating at one of America’s government-sponsored mortgage finance giants that could unlock a huge new lifeline for homeowners, Meredith Whitney wrote for The Financial Times

“As early as this summer, a proposed move could begin to unleash almost $1tn into consumers’ wallets. By the autumn, it could be on its way to $2tn,” Whitney wrote.

That’s if Freddie Mac secures approval from its regulator to operate in the market for secondary mortgages, also commonly known as home equity loans. If greenlighted, the scheme would be equivalent to a huge stimulus injection, but without a cent added to the national deficit, the “Oracle of Wall Street” explained.

Under the plan, Freddie Mac could start purchasing second mortgages and package them into bonds the way it does with primary home loans now. As Freddie Mac is a massive provider of mortgage market liquidity, the move could encourage more banks to extend this financing to customers.

Whitney points out that Americans are sitting on a massive and growing pile of home equity, but little of that is being tapped. More widely available home equity loans would be a boon in particular for older Americans, who are taking on more debt than other age groups and are at growing risk of a financial shock.

Approval would also be well-timed. The proposal noted that options are limited for homeowners who want to tap their equity, meaning that few are benefiting from the housing market’s appreciation.

“For the many homeowners who purchased or refinanced their homes during a period of lower mortgage rates, a traditional cash-out refinance today may pose a significant financial burden, as it requires a refinancing of the entire outstanding loan balance at a new, and likely much higher, interest rate,” it said.

Freddie Mac’s participation seeks to offer a cost-effective alternative. According to Whitney, part of the issue as to why households have so few affordable avenues is a consequence of Great Financial Crisis, as a large number of bank lenders decreased their mortgage exposure following the 2008 crash.

Freddie Mac’s entry into the market could result in $980 billion of home equity financing becoming available to Americans, with that number growing to $3 trillion, Fannie Mae and Ginnie Mae follow suit, Whitney estimated.

“By opening up the securitization market for second mortgages, not only would more institutions be inclined to originate the loans, but the cost to borrowers would meaningfully decline with more finance providers,” Whitney said: “It would also provide big stimulus to an economy and consumer that appear to be slowing down without adding a dime to government debt.”

Read the original article on Business Insider
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May 3, 2024
‘House-rich’ Americans are sitting on nearly $30 trillion in home equity. Here’s how to tap it

Many Americans are house-rich, at least on paper.

Thanks to skyrocketing housing prices, homeowners are now sitting on nearly $30 trillion in home equity, according to the St. Louis Federal Reserve — just shy of the 2022 peak.

That’s roughly $200,000 cash per homeowner in equity that can be tapped, which is the amount most lenders will allow you to take out while still leaving 20% equity in the home as a cushion.

How to tap your home for cash

Up until last year, taking cash out by refinancing was a popular way to access the equity you’ve accumulated in your home. With mortgage rates currently over 7%, that’s suddenly a lot less appealing.

Even with high rates of home equity, borrowers are more likely to take out a second loan to pull cash out, rather than lose their low rate through a cash-out refi.

Otherwise, a home equity line of credit, also known as a HELOC, lets you borrow money against a portion of your home’s equity. Instead of taking out a home loan at a fixed amount, a HELOC is a revolving line of credit, but with better rates than a credit card, that you can use when you want to, or just have on hand.

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Last year, originations of home equity loans and HELOCs increased 50% compared with two years earlier, according to the Mortgage Bankers Association, or MBA.

“Given the nearly $30 trillion of accumulated equity in real estate, there is untapped potential for home equity lending for lenders and borrowers,” said Marina Walsh, MBA’s vice president of industry analysis.

Factor in the terms, rates and risks

When it comes to borrowing against your home, the terms can vary greatly, according to a LendingTree report that analyzed more than 580,000 home equity loan offers across the country.

The average home equity loan amount offered to homeowners is $104,102, LendingTree found. Homes in Iowa had the most favorable terms with an average interest rate of 9.88% — two percentage points higher than the average rate of 7.88% offered in Maryland, the lowest in the nation.

Still, at less than 10%, rates are significantly lower than what it costs to borrow on credit cards, which charge roughly 20%, on average.

However, “it’s not that easy to withdraw money from your home,” said Zillow’s senior economist, Nicole Bachaud. “Not everybody is going to qualify for getting an extra loan.”

Fewer banks offered this option during the height of the Covid pandemic, when lenders tightened their standards to reduce their risk. Access to HELOCs has improved, although the most preferable terms still go to borrowers with higher credit scores and lower debt-to-income ratios.

“Though a home equity loan can be a good way to pay for big expenses, like major renovations, or to consolidate high-interest debt, getting one isn’t without drawback,” added Jacob Channel, LendingTree’s senior economist.

“Not only can qualifying for a home equity loan be more challenging than qualifying for other types of debt, defaulting on a home equity loan can have serious negative consequences,” Channel said. In some extreme instances, defaulting on a home equity loan can mean that you’ll lose your house, he noted.

Even now, “borrowers shouldn’t rush out to get a home equity loan until they fully understand all of the risks associated with them,” Channel cautioned.

Keep in mind that different lenders will also offer different terms and interest rates, Bachaud added. She recommended talking to several mortgage companies or loan officers, as well as weighing all the costs before deciding what makes the most sense.

Subscribe to CNBC on YouTube.

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September 7, 2023
Americans are spending big with credit cards. Here’s what that means for the possibility of a recession

Economists have been forecasting a recession for months, and that looming downturn is one of the most anticipated in U.S. history. But it’s not yet materialized, in part due to strong consumer spending.

“Consumer spending represents more than half of the economy,” said Curt Long, chief economist at the National Association of Federally-Insured Credit Unions. “So if consumer spending is strong, that alone is, generally speaking, enough to keep the economy from slipping into a recession.”

In the first quarter of 2023, gross domestic product grew at a 1.1% rate compared to the previous quarter. This modest level of growth is an improvement from mid-2022 GDP figures, which initially brought recession fears to light.

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A key reason for the fear: Inflation stayed stickier than economists anticipated. In May, the U.S. Bureau of Labor Statistics reported headline annual inflation of 4.9%.

To combat inflation, the Federal Reserve has hiked its overnight bank lending rate 10 times over the past year or so. At the Fed’s May meeting, policymakers hinted that they may pause further interest rate increases, barring unexpected developments.

The end of this tightening cycle may be coming into focus as consumers reach their breaking point. As the pandemic fades, historic levels of personal saving have taken a nosedive. Deposits at banks have crested as consumers keep spending amid continually rising prices.

This is happening as the least well off are increasingly relying on credit in their day-to-day lives. Roughly 29% of households earning less than $50,000 a year were using credit cards to finance their spending, according Bank of America Institute economists. Credit-use rates have risen steadily in recent years despite being below higher pre-pandemic levels.

Moderate-income Americans also are facing the significant headwind of less tax-refund money. The average refund this year is $2,777 through April 28, down 8% from the same period last year, according to IRS data.

“Because this is the same household that rely more on the tax refund to finance their spending, a lower refund really has some negative impact on their spending,” said Anna Zhou, an economist at the Bank of America Institute.

Analysts at the New York Federal Reserve report record levels of credit card debt in 2023. This underscores the economic split in the country, with some consumers flush with savings following a thrifty pandemic while others are finding it increasingly difficult to spend wisely amid rising prices, mounting layoffs and the potential of recession.

Still economists see the chance for a soft landing. “We don’t think … the slowdown process will be as dramatic as some people have feared,” said Zhou. “And it will be a gradual process.”

Watch the video above to learn how U.S. consumer spending has so far fended off a recession.

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May 11, 2023
Rent or buy? Here’s how to make that decision in the current real estate market

Choosing whether to rent or buy has never been a simple decision — and this ever-changing housing market isn’t making it any easier. With surging mortgage rates, record rents and home prices, a potential economic downturn and other lifestyle considerations, there’s so much to factor in.

“This is an extraordinarily unique market because of the pandemic and because there was such a run on housing so you have home prices very high, you also have rent prices very high,” said Diana Olick, senior climate and real estate correspondent for CNBC.

By the numbers, renting is often cheaper. On average across the 50 largest metro areas in the U.S., a typical renter pays about 40% less per month than a first-time homeowner, based on asking rents and monthly mortgage payments, according to Realtor.com.

In December 2022, it was more cost-effective to rent than buy in 45 of those metros, the real estate site found. That’s up from 30 markets the prior year.

How does that work out in terms of monthly costs? In the top 10 metro regions that favored renting, monthly starter homeownership costs were an average of $1,920 higher than rents.

But that has not proven to be the case for everyone.

Leland and Stephanie Jernigan recently purchased their first home in Cleveland for $285,000 — or about $100 per square foot. The family of seven will also have Leland’s mother, who has been fighting breast cancer, moving in with them.

By their calculations, this move — which expands their space threefold and allowing them to take care of Leland’s mother — will be saving them more than $700 per month.

‘You don’t buy a house based on the price of the house’

“You don’t buy a house based on the price of the house,” Olick said. “You buy it based on the monthly payment that’s going to be principal and interest and insurance and property taxes. If that calculation works for you and it’s not that much of your income, perhaps a third of your income, then it’s probably a good bet for you, especially if you expect to stay in that home for more than 10 years. You will build equity in the home over the long term, and renting a house is really just throwing money out.”

Mortgage rates dropped slightly in early March, due to the stress on the banking system from the recent bank failures. They are moving up again, although they are currently not as high as they were last fall. The average rate on a 30-year fixed-rate mortgage is 6.59% as of April — up from 3.3% around the same time in 2021.

But that hasn’t significantly dampened demand.

“As the markets kind of bubbled in certain parts of the country and other parts of the country priced out, we’ve seen a lot of investors coming in looking for affordable homes that they can buy and rent,” said Michael Azzam, a real estate agent and founder of The Azzam Group in Cleveland.

“We’re still seeing relatively high demand” he added. “Prices have still continued to appreciate even with interest rates where they’re at. And so we’re still seeing a pretty active market here.”

Buying a home is part of the American Dream

The Jernigans are achieving a big part of the American Dream. Buying a home is a life event that 74% of respondents in a 2022 Bankrate survey ranked as the highest gauge of prosperity — eclipsing even having a career, children or a college degree.

The purchase is also a full-circle moment for Leland, who grew up in East Cleveland, where his family was on government assistance.

“I came from a single-mother home who struggled to put food on the table and always wanted better for her children … it was more criminals than there were police … It is not the type of neighborhood that I wanted my children to grow up in,” said Jernigan.

The new homeowner also has his eye on building a brighter future for more children than just his own. Jernigan plans to purchase homes in his old neighborhood, renovate them and create a safe space for those growing up like he did.

“I’m here because someone saw me and saw the potential in me and gave me advice that helped me. … and I just want to pay it forward to someone else” Jernigan said.

Watch the video above to learn more.

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April 26, 2023
Insider Q&A: Ken Lin, CEO of Credit Karma

NEW YORK — Credit Karma is probably best known for giving Americans regular access to their credit scores, but the San Francisco-based company also acts as a starting place to shop for a loan, bank account or mortgage.

Roughly 76 million Americans have used Credit Karma, giving the company a broad view into Americans’ borrowing habits.

CEO Ken Lin spoke to The Associated Press about what financial products borrowers are still shopping for in this high inflation economy, as well as Americans’ spending habits.

The interview has been edited for length and clarity.

Q: What have you seen in credit card activity in recent months as Americans deal with high inflation and economic uncertainty?

A: Unemployment continues to be relatively low. What we’ve been seeing is a lot of origination happening in credit cards. The other unique phenomenon is while interest rates go up, the large banks are still trying to be competitive. They’re able to do a lot of lending in this environment. Consumer spending is going great. Americans still have historically lower credit card balances, and while they are building up those balances again, it’s still healthy.

Q: Mortgage rates have gone up considerably, and we have seen mortgage activity decrease. What are you seeing?

A: Most of the mortgage market is refinancing. Nobody is refinancing right now because the prevailing rate for many mortgages for so many years was 3% or 4%. Now we’re at 7%. You’re not really going refinance to get a higher rate.

What we have seen is a much larger number of people are going into home equity lines of credit or home equity loans. People are finding that more economical. Unless you’re really desperate, you’re not going to do a cash out refinance.

Q: Higher interest rates can mean higher yields on savings accounts, but banks for some time did not need additional deposits so they weren’t paying for them. Are they still dragging their heels?

A: I think this is an opportunity for most consumers to really be more cognizant, more thoughtful around their finances, because we assume when rates are going up, that the money in our savings accounts is going up, and that’s generally not the case. You really need to push your bank to offer you that higher yield, or even open a new account elsewhere.

Q: What are your thoughts on the growth of buy now, pay later loans?

A: I think it’s a little bit of a dangerous space. One of the nice things about the traditional credit industry is they are able to calculate and understand how much debt you have relative to the amount of income you earn. There’s no such visibility into buy now, pay later products. You can take out one loan with multiple companies and none of them would know, which I think makes it easy for borrowers to get in over their heads.

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November 21, 2022
‘Zombie Debt’: Homeowners face foreclosure on old mortgages

Rose Prophete thought the second mortgage loan on her Brooklyn home was resolved about a decade ago — until she received paperwork claiming she owed more than $130,000.

“I was shocked,” said Prophete, who refinanced her two-family home in 2006, six years after arriving from Haiti. “I don’t even know these people because they never contacted me. They never called me.”

Prophete is part of a wave of homeowners who say they were blindsided by the start of foreclosure actions on their homes over second loans that were taken out more than a decade ago. The trusts and mortgage loan servicers behind the actions say the loans were defaulted on years ago.

Some of these homeowners say they weren’t even aware they had a second mortgage because of confusing loan structures. Others believed their second loans were rolled in with their first mortgage payments or forgiven. Typically, they say they had not received statements on their second loans for years as they paid down their first mortgages.

Now they’re being told the loans weren’t dead after all. Instead, they’re what critics call “zombie debt” — old loans with new collection actions.

While no federal government agency tracks the number of foreclosure actions on second mortgages, attorneys aiding homeowners say they have surged in recent years. The attorneys say many of the loans are owned by purchasers of troubled mortgages and are being pursued now because home values have increased and there’s more equity in them.

“They’ve been holding them, having no communication with the borrowers,” said Andrea Bopp Stark, an attorney with the Boston-based National Consumer Law Center. “And then all of a sudden they’re coming out of the woodwork and are threatening to foreclose because now there is value in the property. They can foreclose on the property and actually get something after the first mortgages are paid off.”

Attorneys for owners of the loans and the companies that service them argue that they are pursuing legitimately owed debt, no matter what the borrower believed. And they say they are acting legally to claim it.

How did this happen?

Court actions now can be traced to the tail end of the housing boom earlier this century. Some involve home equity lines of credit. Others stem from “80/20” loans, in which homebuyers could take out a first loan covering about 80% of the purchase price, and a second loan covering the remaining 20%.

Splitting loans allowed borrowers to avoid large down payments. But the second loans could carry interest rates of 9% or more and balloon payments. Consumer advocates say the loans — many originating with since-discredited lenders — included predatory terms and were marketed in communities of color and lower-income neighborhoods.

The surge in people falling behind on mortgage payments after the Great Recession began included homeowners with second loans. They were among the people who took advantage of federal loan modification programs, refinanced or declared bankruptcy to help keep their homes.

In some cases, the first loans were modified but the second ones weren’t.

Some second mortgages at that time were “charged off,” meaning the creditor had stopped seeking payment. That doesn’t mean the loan was forgiven. But that was the impression of many homeowners, some of whom apparently misunderstood the 80/20 loan structure.

Other borrowers say they had difficulty getting answers about their second loans.

In the Miami area, Pastor Carlos Mendez and his wife, Lisset Garcia, signed a modification on their first mortgage in 2012, after financial hardships resulted in missed payments and a bankruptcy filing. The couple had bought the home in Hialeah in 2006, two years after arriving from Cuba, and raised their two daughters there.

Mendez said they were unable to get answers about the status of their second mortgage from the bank and were eventually told that the debt was canceled, or would be canceled.

Then in 2020, they received foreclosure paperwork from a different debt owner.

Their attorney, Ricardo M. Corona, said they are being told they owe $70,000 in past due payments plus $47,000 in principal. But he said records show the loan was charged off in 2013 and that the loan holders are not entitled to interest payments stemming from the years when the couple did not receive periodic statements. The case is pending.

“Despite everything, we are fighting and trusting justice, keeping our faith in God, so we can solve this and keep the house,” Mendez said in Spanish.

Second loans were packaged and sold, some multiple times. The parties behind the court actions that have been launched to collect the money now are often investors who buy so-called distressed mortgage loans at deep discounts, advocates say. Many of the debt buyers are limited liability companies that are not regulated in the way that big banks are.

The plaintiff in the action on the Mendez and Garcia home is listed as Wilmington Savings Fund Society, FSB, “not in its individual capacity but solely as a Trustee for BCMB1 Trust.”

A spokeswoman for Wilmington said it acts as a trustee on behalf of many trusts and has “no authority with respect to the management of the real estate in the portfolio.” Efforts to find someone associated with BCMB1 Trust to respond to questions were not successful.

Some people facing foreclosure have filed their own lawsuits citing federal requirements related to periodic statements or other consumer protection laws. In Georgia, a woman facing foreclosure claimed in federal court that she never received periodic notices about her second mortgage or notices when it was transferred to new owners, as required by federal law. The case was settled in June under confidential terms, according to court filings.

In New York, Prophete is one of 13 plaintiffs in a federal lawsuit claiming that mortgage debt is being sought beyond New York’s six-year statute of limitations, resulting in violations of federal and state law.

“I think what makes it so pernicious is these are homeowners who worked very hard to become current on their loans,” said Rachel Geballe, a deputy director at Brooklyn Legal Services, which is litigating the case with The Legal Aid Society. “They thought they were taking care of their debt.”

The defendants in that case are the loan servicer SN Servicing and the law firm Richland and Falkowski, which represented mortgage trusts involved in the court actions, including BCMB1 Trust, according to the complaint. In court filings, the defendants dispute the plaintiff’s interpretation of the statute of limitations, say they acted properly and are seeking to dismiss the lawsuit.

“The allegations in the various mortgage foreclosure actions are truthful and not misleading or deceptive,” Attorney Daniel Richland wrote in a letter to the judge. “Plaintiff’s allegations, by contrast, are implausible and thus warrant dismissal.”

———

Associated Press writer Claudia Torrens and researcher Jennifer Farrar in New York contributed to this report.

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November 16, 2022
‘Zombie Debt’: Homeowners face foreclosure on old mortgages

Rose Prophete thought the second mortgage loan on her Brooklyn home was resolved about a decade ago — until she received paperwork claiming she owed more than $130,000.

“I was shocked,” said Prophete, who refinanced her two-family home in 2006, six years after arriving from Haiti. “I don’t even know these people because they never contacted me. They never called me.”

Prophete is part of a wave of homeowners who say they were blindsided by the start of foreclosure actions on their homes over second loans that were taken out more than a decade ago. The trusts and mortgage loan servicers behind the actions say the loans were defaulted on years ago.

Some of these homeowners say they weren’t even aware they had a second mortgage because of confusing loan structures. Others believed their second loans were rolled in with their first mortgage payments or forgiven. Typically, they say they had not received statements on their second loans for years as they paid down their first mortgages.

Now they’re being told the loans weren’t dead after all. Instead, they’re what critics call “zombie debt” — old loans with new collection actions.

While no federal government agency tracks the number of foreclosure actions on second mortgages, attorneys aiding homeowners say they have surged in recent years. The attorneys say many of the loans are owned by purchasers of troubled mortgages and are being pursued now because home values have increased and there’s more equity in them.

“They’ve been holding them, having no communication with the borrowers,” said Andrea Bopp Stark, an attorney with the Boston-based National Consumer Law Center. “And then all of a sudden they’re coming out of the woodwork and are threatening to foreclose because now there is value in the property. They can foreclose on the property and actually get something after the first mortgages are paid off.”

Attorneys for owners of the loans and the companies that service them argue that they are pursuing legitimately owed debt, no matter what the borrower believed. And they say they are acting legally to claim it.

How did this happen?

Court actions now can be traced to the tail end of the housing boom earlier this century. Some involve home equity lines of credit. Others stem from “80/20” loans, in which homebuyers could take out a first loan covering about 80% of the purchase price, and a second loan covering the remaining 20%.

Splitting loans allowed borrowers to avoid large down payments. But the second loans could carry interest rates of 9% or more and balloon payments. Consumer advocates say the loans — many originating with since-discredited lenders — included predatory terms and were marketed in communities of color and lower-income neighborhoods.

The surge in people falling behind on mortgage payments after the Great Recession began included homeowners with second loans. They were among the people who took advantage of federal loan modification programs, refinanced or declared bankruptcy to help keep their homes.

In some cases, the first loans were modified but the second ones weren’t.

Some second mortgages at that time were “charged off,” meaning the creditor had stopped seeking payment. That doesn’t mean the loan was forgiven. But that was the impression of many homeowners, some of whom apparently misunderstood the 80/20 loan structure.

Other borrowers say they had difficulty getting answers about their second loans.

In the Miami area, Pastor Carlos Mendez and his wife, Lisset Garcia, signed a modification on their first mortgage in 2012, after financial hardships resulted in missed payments and a bankruptcy filing. The couple had bought the home in Hialeah in 2006, two years after arriving from Cuba, and raised their two daughters there.

Mendez said they were unable to get answers about the status of their second mortgage from the bank and were eventually told that the debt was canceled, or would be canceled.

Then in 2020, they received foreclosure paperwork from a different debt owner.

Their attorney, Ricardo M. Corona, said they are being told they owe $70,000 in past due payments plus $47,000 in principal. But he said records show the loan was charged off in 2013 and that the loan holders are not entitled to interest payments stemming from the years when the couple did not receive periodic statements. The case is pending.

“Despite everything, we are fighting and trusting justice, keeping our faith in God, so we can solve this and keep the house,” Mendez said in Spanish.

Second loans were packaged and sold, some multiple times. The parties behind the court actions that have been launched to collect the money now are often investors who buy so-called distressed mortgage loans at deep discounts, advocates say. Many of the debt buyers are limited liability companies that are not regulated in the way that big banks are.

The plaintiff in the action on the Mendez and Garcia home is listed as Wilmington Savings Fund Society, FSB, “not in its individual capacity but solely as a Trustee for BCMB1 Trust.”

A spokeswoman for Wilmington said it acts as a trustee on behalf of many trusts and has “no authority with respect to the management of the real estate in the portfolio.” Efforts to find someone associated with BCMB1 Trust to respond to questions were not successful.

Some people facing foreclosure have filed their own lawsuits citing federal requirements related to periodic statements or other consumer protection laws. In Georgia, a woman facing foreclosure claimed in federal court that she never received periodic notices about her second mortgage or notices when it was transferred to new owners, as required by federal law. The case was settled in June under confidential terms, according to court filings.

In New York, Prophete is one of 13 plaintiffs in a federal lawsuit claiming that mortgage debt is being sought beyond New York’s six-year statute of limitations, resulting in violations of federal and state law.

“I think what makes it so pernicious is these are homeowners who worked very hard to become current on their loans,” said Rachel Geballe, a deputy director at Brooklyn Legal Services, which is litigating the case with The Legal Aid Society. “They thought they were taking care of their debt.”

The defendants in that case are the loan servicer SN Servicing and the law firm Richland and Falkowski, which represented mortgage trusts involved in the court actions, including BCMB1 Trust, according to the complaint. In court filings, the defendants dispute the plaintiff’s interpretation of the statute of limitations, say they acted properly and are seeking to dismiss the lawsuit.

“The allegations in the various mortgage foreclosure actions are truthful and not misleading or deceptive,” Attorney Daniel Richland wrote in a letter to the judge. “Plaintiff’s allegations, by contrast, are implausible and thus warrant dismissal.”

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Associated Press writer Claudia Torrens and researcher Jennifer Farrar in New York contributed to this report.

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November 15, 2022