WILLIAM BRANGHAM: They are# called zombie mortgages,## debts that homeowners thought were# forgiven or satisfied long ago,## only to learn that they still exist and# that they could cost them their homes.

Economics correspondent Paul Solman and producer## Diane Lincoln Estes have our look# at these back-from-the-dead debts.

This story is a partnership with Retro# Report, which is a documentary news group## that delves back into major events of the# past to understand their relevance today.

PAUL SOLMAN: Single dad Terence Hardin bought# this home in Bowie, Maryland, 20 years ago.

TERENCE HARDIN, Former Homeowner:# Four-bedroom house, single-family,## nice yard, very friendly neighbors.

PAUL SOLMAN: Hardin took out a# $316,000 mortgage for the purchase,## a $35,000 second mortgage soon after.

TERENCE HARDIN: So I had a mortgage and a second# mortgage after owning the property for a year.

PAUL SOLMAN: But then the housing bubble# burst.

Home prices plunged.

Hardin,## like millions of Americans, owed# more than his house was worth.## So he was vastly relieved to get a loan# modification through a government program.

TERENCE HARDIN: The payment is# very much reasonable.

There is## no second mortgage, and I'm able to breathe.

PAUL SOLMAN: For the next eight years,# Hardin paid his mortgage.

By September 2023,## he had built almost $200,000 in# equity.

Then his neighbor called.

TERENCE HARDIN: There was some service# that was taking stuff out of my home in## trash bags and plastic bags and putting# it on the lawn, at which point I,like,## raced home from work in order to try# to find out what was going on.

I was## informed by the sheriff's department that# I had four hours to collect my belongings.

PAUL SOLMAN: Hardin was# being evicted from his home.

TERENCE HARDIN: Furniture, dishes,# medications, foods, toys, pictures## just all shoved in a black bag# and strung across the front yard.

PAUL SOLMAN: Daughter Olivia was then 14.

How did you react?

OLIVIA HARDIN, Daughter of Terence Hardin:# I just saw all o.. front lawn in black bags.

I was just# so -- I was -- I was just in shock.

PAUL SOLMAN: So what happened?

Kind# of like a zombie in a horror film,## that second mortgage Hardin believed# to have been modified and rolled in## with his first all those years# ago had risen from the dead.

ANDREW ENGEL, Dann Law: A zombie mortgage# is a mortgage that the borrowers thought## was dead because of inactivity by the lender# for so many years, and then out of the blue## recently has risen from the dead, so# to speak, to claim its pound of flesh.

PAUL SOLMAN: Foreclosure attorney Andy Engel# explains that second mortgages were worth so## little in the wake of the housing collapse that# lenders simply didn't bother to collect on them.

ANDREW ENGEL: However, they did# bundle these mortgages up and## sell them on the secondary market# often for pennies on the dollar.

BETH JACOBSON, Strategic Housing Solutions:# The judge in New York used to talk about## these loans are passed around like# a whiskey bottle at a frat party.

PAUL SOLMAN: Homeowner advocate Beth Jacobson.

BETH JACOBSON: That's what these# second mor.. packaged and repackaged and repackaged and sold.

ANDREW ENGEL: And the people# who bought those loans then## just sat and waited.

And they were# waiting for market values to come## back on the real estate to make those# mortgages actually have value again.

PAUL SOLMAN: Post COVID-19 pandemic,## that's just what happened across the# country, as property values soared.

ANDREW ENGEL: And, all of a sudden, those# dead mortgages that had no value at all## now have value, and the owners of those# mortgages are filing for closure cases.

PAUL SOLMAN: Homeowner Terence# Hardin says he was blindsided.

TERENCE HARDIN: I got nothing from these people.# I have got nothing from them.

I did not find out## until the day I was removed from my home that# there was even a second mortgage out there.

BETH JACOBSON: It's not bad enough that this# zombie second is coming back to collect on## a mortgage that you may have taken out 20# years ago and forgot about.

They're adding## interest every single day, even though# they didn't send mortgage statements out.

PAUL SOLMAN: According to Bloomberg News,## more than 600,000 second mortgages issued before# the financial crisis could.. Jerry and Sharon Lomurno took out a# $30,000 second mortgage on their Madison,## Ohio, home back in 2006.

They thought it was# discharged in bankruptcy a few years later.

JERRY LOMURNO, Homeowner: For over 15 years,## we had just assumed that the# debt had been wiped away.

PAUL SOLMAN: Then, in October# 2024, Jerry got a phone call.

MAN: Jerome, good morning.# It's Isaac with SMS Financial.

JERRY LOMURNO: And he says, well, we have# an outstanding debt of roughly $75,000,## $80,000 with interest that hasn't been# paid on this since roughly 2008-2009.## And we need to know what you're willing to# pay in order to bring your account current.

Then came the calls from house# hunters looking for a bargain.

SHARON LOMURNO, Homeowner: This guy says: "Hi.# I'm so-and-so."

He goes: "I was wondering if## you're interested in selling your house."

And I# said: "No.

Why would I want to sell my house?"

And he goes: "Well, because there's a lien on it# and you're in foreclosure."

And I was stunned.

ANDREW ENGEL: OK, so this is the document.

PAUL SOLMAN: Engel, the Lomurnos' lawyer,## says there's no proof SMS Financial actually# owns the second mortgage in question.

ANDREW ENGEL: And there's a further issue# of whether SMS Financial can charge interest## during a time period when it did not issue monthly# statements.

And that is a federal law requirement.

PAUL SOLMAN: Neither SMS Financial nor their# lawyers responded to requests for interviews,## but in public notices, the Consumer# Financial Protection Bureau warned that## federal laws generally require debt collectors# to provide homeowners with periodic statements.

Moreover, it said, it's illegal for debt# collectors to sue to collect debts past## the statute of limitations.

The bureau had# been investigating zombie debt collectors,## but its work was essentially shut down# last February by the Trump administration.

KRISTI KELLY, Kelly Guzzo: We're trying to stand# up for these consumers since nobody else is.

PAUL SOLMAN: Lawyer Kristi Kelly# has filed numerous individual and## class action lawsuits against# zombie mortgage collectors.

KRISTI KELLY: For most of the loans that I see,## they are being assessed retroactive# interest for every single month for 10,## 15 years for times where they did not receive# statements or were explicitly told or provided## communications stating that interest# wouldn't be charged for that time frame.

PAUL SOLMAN: In one class action# settlement, zombie debt collector## Dyck-O'Neal canceled the retroactive# interest that had charged Kelly's client.

KRISTI KELLY: We learned# through discovery that his## loan was purchased for approximately# 87 cents.

And prior to coming to me,## he was told he had to pay $170,000 or# they were going to foreclose on his loan.

PAUL SOLMAN: Now, a few states have passed# laws to crack down on deceptive practices,## including Virginia, where Kelly's based.

KRISTI KELLY: We were able to pass# legislation that required these zombie## second mortgage holders to certify in an# affidavit, before you take someone's home,## for all time periods where you're assessing# interest, that statements were sent.

ANNOUNCER: This is "The Passive# Income Attorney" podcast.

PAUL SOLMAN: But for debt collectors, these# zombie loans are great investment opportunities.

JAMES MAFFUCCIO, Co-Founder, Aspen Funds: One# man's toxic assets are another man's treasure.

PAUL SOLMAN: James Maffuccio# co-founded Aspen Funds,## which buys second mortgages,# including Terence Hardin's.

JAMES MAFFUCCIO: We like to see the# homeowners making the payment on the## 1st.

So now we know we have got a property# that somebody's taken care of for the most## part.

They're living in it and they're# paying down the first mortgage.

So our## position's actually getting stronger as they# continue to pay down that first mortgage.

PAUL SOLMAN: Maffuccio has described his# investment strategy on multiple podcasts,## but didn't respond to our interview requests.

JAMES MAFFUCCIO: If we buy a million dollars# worth of these non-performing second mortgages,## we are going to receive back $2.2 million to $2.5# million.

It's just been consistently good for us.

PAUL SOLMAN: Good for them,# not so good for the homeowner.

JAMES MAFFUCCIO: We can reach# out to the borrower.

Usually,## they're in denial.

And they will say, we don't# really owe that.

We thought that got charged off,## whatever, whatever.

And so we will start# the foreclosure process.

And it's really## just an incentive tool, because we# do not like the foreclose on people.

PAUL SOLMAN: And, of course, people# don't like to be foreclosed on.

ANDREW ENGEL: You get a lot of anxiety, a lot of# fear.

That fear is what motivates people to take## actions, pay off the loan, do anything to avoid# this.

I personally believe the buyers of these## debts are banking on that drastic reaction of# initial fear and trying to avoid losing the house.

PAUL SOLMAN: Unfortunately,# for Terence and Olivia Hardin,## their home was sold in foreclosure# before they knew what was happening.

BETH JACOBSON: And the way Maryland works is# that if you, as the homeowner, don't file a## motion in the court, you never see the light# of day of a court.

It was just pushed through.

PAUL SOLMAN: Maffuccio's investment fund# sold the Hardins' home to itself, paid the## balance on the first mortgage, then resold the# home with a likely profit of over 100 grand.

TERENCE HARDIN: All of the equity# that I have built in my house was## stolen right out from under us.

And there's# nothing I can do about that at this point.

PAUL SOLMAN: Terence Hardin now rents# an apartment not far from his old house## so his daughter Olivia can go to the same school.

TERENCE HARDIN: The home was going to be a# source of monies for tuition fees.

And that## is gone.

It's no longer I can rely on that.# So it's almost like starting all over again.

JERRY LOMURNO: I pray every single# day that this foreclosure will go## away and that Sharon and I will# be able to stay in this house.

PAUL SOLMAN: The Lomurnos are fighting# debt collector SMS Financial in court.

JERRY LOMURNO: We're really not in a# position to be able to pay $75,000,## on a $30,000 second mortgage from 2006 that# hasn't been enforced for over 15 years.

PAUL SOLMAN: And as of January, they began# mediation negotiations with SMS Financial.

For the "PBS News Hour," Paul Solman.