Housing counselors in Chicago and across the country report a new trend they call disturbing: mortgage lenders selling or transferring delinquent loan to debt collectors for pennies on the dollar, then walking away from the troubled loan.
Struggling homeowners who are in the dark about this transaction say they had no idea why a debt collector was suddenly calling them and mailing demands for money.
"I had never heard of a collection agency taking over a mortgage like that before. So I was afraid and I thought it was some kind of scam because you know, scams are going on everywhere," said homeowner Linda Foster, who lives in Chicago's West Pullman neighborhood.
Foster admits she fell behind on her mortgage payments after her husband died unexpectedly last year. She said she was still awaiting an answer on her application for a loan modification from JPMorgan Chase when a debt collector sent her a letter. In it, the New Jersey-based debt collector demanded she pay the remainder of her mortgage principal in full. The balance was $117, 465.07.
"I was just devastated then. In the back of my mind I'm going, 'Am I going to come home one day and all my furniture's out on the street?'."
Michael van Zalingen with Neighborhood Housing Services calls the practice "cynical."
"It goes against all of the (banks') statements that their talking heads and presidents make in the news media where they say they want to help everybody and they're gonna work with homeowners," he said.
The fact that banks are charging off bad loans is not new. Experts say the accounting procedure is used routinely for credit card debt, car payments and other consumer debt. But the idea of charging off a homeowner's primary loan is a new trend, they say, which does not bode well for the consumers involved.
"They (the debt collectors) don't even actually have to foreclose. They could just file a collection lawsuit against the homeowner, get a judgment against them for the full face value of the loan, and then garnish their wages forever," van Zalingen explained.
Debt collectors are not governed by the same strict regulations as are lenders, and are part of an industry notorious for past abusive collection efforts. Housing advocates worry that more banks will turn to this method, because it will save them money and messy situations.
"It's the bank saying, 'You're not worth dealing with. We'd rather just take some money from someone and make you go away. And let it be their problem,'" said van Zalingen.
Debt collectors have a number of collection options at their disposal, but cannot immediately kick homeowners to the curb. They must follow foreclosure law if they plan to take the home through that method.
For its part, Chase said it did try to work with Linda Foster and did lower her payments. But ultimately, in the case of seriously delinquent accounts, it may hire a third-party vendor to do collections.
Still, the bigger question remains: why hire a debt collector instead of foreclosure, as is the norm? To that, a Chase spokesperson did not offer comment.
Housing advocates said it is clearly cheaper for a bank to have a debt collector do the dirty work.