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 California have up to four 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.
The phenomenon suggests an ominous, looming echo of today's real estate meltdown. As debt collectors surely seek at least partial repayment of millions of dollars in unpaid Sacramento home loans, some say renewed financial stresses on tens of thousands of local 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 Carmichael-based Mortgage Resolution Services. 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."
Total amount of debt unknown
One of the biggest players in the business, Texas-based Real Time Resolutions, did not respond to an inquiry on the subject from The Bee. Neither did Bank of America, which holds many defaulted Sacramento-area loans made by its Countrywide affiliate during the real estate boom.
Regionally, no one knows for sure how much unpaid debt is on the line. CoBen said people who used their borrowings for a traditional loan on a house in which they lived generally have little to worry about.
But statistics suggest that tens of thousands of borrowers locally may be vulnerable in years ahead. Generally, they are people 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 across Sacramento during the housing boom.
The Sacramento metro area - Sacramento, Yolo, Placer and El Dorado counties - now ranks second nationally for delinquencies on these loans, according to Oakland-based Foresight Analytics, a real estate consulting firm. The firm said 7.9 percent of the $2.9 billion in area "seconds" now on bank balance sheets are delinquent. Only Las Vegas has a higher rate.
Call The Sacramento Bee's Jim Wasserman, (916) 321-1102 or email him at [email protected]. Read his blog on real estate, Home Front, at www.sacbee.com/blogs.