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.

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 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 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.”

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
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% 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% 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 the short sale. It goes
into effect April 5, 2010 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.

In California, Democratic state Sen. Ellen Corbett recently introduced
SB 1178, which would expand California’s protections for some people who
refinance and take on a second mortgage.

People who refinance, but use the funds to improve their homes or to
stay in their homes with a better interest rate, would be protected.
Lenders could not seek court judgments to collect from these borrowers
in the event of foreclosure or short sales.

“If you refinance a property and aren’t using the money for personal
reasons, you shouldn’t lose your personal protections,” said California
Association of Realtors lobbyist Alex Creel. He said the idea has been
around for years but has become more urgent as thousands lose income and
fall into mortgage trouble. The bill would apply to all foreclosures or
short sales that occur after it becomes law. It doesn’t matter when the
loan was made, Creel said. SB 1178 is still in the early stages of
consideration. It must clear both houses of the Legislature and be
signed by Gov. Arnold Schwarzenegger by Sept. 30 in order to take effect.

(c) 2010, The Sacramento Bee (Sacramento, Calif.).

Distributed by McClatchy-Tribune Information Services.