Scott Amable remembers answering the doorbell. A man in jeans and a plaid shirt was standing at the threshold, craning his neck to see inside. Scott's wife, Kari, looked on from the living room in disbelief as the man informed them that they were no longer homeowners.
"This gentleman shows up at our door and says, 'I bought your house. You need to move out,'" Scott recalled.
The Amables lost their three-bedroom rambler in Pacheco, California, to foreclosure in 2021 because they couldn't come up with roughly $200,000 that a debt collector said they owed on a second mortgage. It was a shocking amount, more than double the $98,000 they had borrowed.
In many ways, the Amables' personal tragedy played out like a typical foreclosure sale in Contra Costa County, northeast of San Francisco. What wasn't normal: Their original lender had sent them each a tax document more than a decade earlier saying their debt had been canceled.
Thousands of miles away, in Miami Beach, Florida, the company that foreclosed on them knew all about those documents. It had copies of them. Yet the firm, known as ARCPE or ARC, foreclosed anyway, realizing a 3,321% return on investment.
ARC had bought the Amables' loan from their original lender for just $2,131. It was one of thousands of second mortgages the company had purchased in bulk from financial firms across America, and almost all of them had something in common: Other lenders had written them off and then sold them for pennies on the dollar.
David Gordon, one of ARC's managing partners, defended the firm's practices in an interview with Bloomberg. "We try to work with borrowers as much as we can," he said, adding: "We're not looking to kick people out of their homes."
ARC is one of several debt collectors across the US that have specialized in buying a certain type of loan. Often called "zombie" mortgages or "sleeper seconds," these loans had lain dormant for years. Borrowers took them out before the Great Recession, as the housing bubble expanded. After home prices crashed, these second mortgages became all but worthless to lenders. Even if they seized the homes and sold them, the proceeds wouldn't be enough to cover the first mortgages, let alone the seconds. So the banks took losses on their books and stopped sending statements to borrowers.
As the housing market came roaring back, however, ARC and others made it their business to bring these loans back to life, upending borrowers' lives in the process.
While these companies often brand themselves as investors, their main business is debt collection. They buy old second mortgages from banks and other financial institutions, then they hire law firms and vendors known as servicers that demand people pay unexpectedly high balances or risk losing their homes.
Based out of a high-rise overlooking Biscayne Bay, ARC illustrates how some zombie-mortgage collectors operate, according to a Bloomberg investigation that drew on nearly 1 million internal company files, thousands of public records and interviews with more than 100 borrowers, attorneys, former employees and industry insiders.
The internal records, which cover collections through July 2021, show that ARC routinely sought and often collected tens of thousands of dollars in back interest -- leading to huge returns on loans it bought at fire-sale prices.
State and federal laws limit the back interest that debt collectors can charge if borrowers haven't received regular statements or if too much time has passed.
Pinpointing exactly how much interest is actually owed can be difficult. However, in loan after loan, ARC's own files show borrowers hadn't been contacted about their debts in years. The company demanded repayment of back interest anyway, blindsiding homeowners with unexpectedly large balances and threats of foreclosure.
After speaking with Gordon, Bloomberg sent detailed questions to ARC about its practices and dealings with specific borrowers, including the Amables. In a statement, Nathaniel Callahan, a lawyer for ARC, said the company hired servicers to handle collections, and the servicers' contracts required them to follow the law. ARC itself did not "process payments, engage in collection activity, or communicate with borrowers directly about their loans," he said.
Yet ARC's own records show the company often played an active role in collections. It calculated the amounts that would be demanded from borrowers and sometimes interacted directly with them. In at least one case, an internal email suggests the firm negotiated a settlement without informing its servicer: "don't let them know that we received a payoff," it said.
Callahan said that even if servicers failed to send regular statements, that wouldn't "by itself invalidate interest accrual or collection." Yet since 2017, federal regulations have effectively barred lenders from demanding back interest on loans for which they've taken losses, notified borrowers and stopped sending statements.
Bloomberg reviewed more than 140 lawsuits about zombie loans that alleged several companies violated these rules and other consumer-protection laws. Five involved ARC.
Callahan also said that the types of tax documents the Amables received, called 1099-Cs, do "not mean the debt was discharged, precluding interest accrual or collection." While most courts have held that 1099-Cs are not definitive proof of debt forgiveness, the forms show that at a minimum, lenders stopped collecting the debts. If borrowers report 1099-Cs on their income taxes, as the Amables did, that's strong evidence their loans have been canceled, according to the National Consumer Law Center.
NCLC also said it's deceptive -- and potentially unlawful -- for debt collectors to threaten foreclosure over loans that people had good reason to consider canceled or forgotten. After all, borrowers weren't getting regular statements, they stopped seeing the loans on their credit reports and, in some cases, they received tax documents that said their debt was canceled.
ARC's internal records provide rare insights into the kinds of profits these debt collectors can make. Bloomberg obtained the documents from Distributed Denial of Secrets. The journalistic nonprofit receives and archives hacked and leaked materials in the public interest.
The most recent data in the trove, from 2021, shows ARC had yet to collect on more than 7,000 second mortgages. But it had closed the books on hundreds of others.
To identify which loans to collect on, ARC broke its work into discrete steps, according to an "Operations Primer." One team would buy pools of second mortgages auctioned off by banks and other sellers. Underwriters would comb through property and mortgage records, then make recommendations about how to collect. Records show ARC also tracked borrowers' first-mortgage balances and home values.
Letters sent on ARC's behalf often told borrowers that they had a little more than a month to pay all past due amounts, including years of back interest. "If you have not cured the default by the above date, LENDER MAY COMMENCE FORECLOSURE ACTION AGAINST YOU," said one demand letter sent to a New Jersey homeowner who had 33 days to come up with $131,080.
To understand the scope of the zombie second mortgage problem, Bloomberg analyzed property records across the US and found that more than 600,000 second mortgages issued in the years before the financial crisis could still be a threat to borrowers. But inaction by most state lawmakers and federal regulators has left borrowers with little defense against debt collectors who seek to exploit them.
In recent years, four states have passed legislation that addresses predatory practices related to zombie second mortgages. But the laws provide no relief to people who've already paid or who've lost their homes. And they all require homeowners to assert their rights under a confusing patchwork of consumer-protection laws that are riddled with holes.
The federal government was poised to intervene this year -- but President Donald Trump's administration hobbled that initiative.
The Consumer Financial Protection Bureau had opened investigations into at least three companies involved in collecting zombie seconds, according to two people with direct knowledge of the probes. The people said an initial enforcement case was expected to be filed during the first quarter of this year. In addition, the agency sought details from eight firms on the scale of their work with zombie mortgages, according to three people familiar with the operation as well as agency records reviewed by Bloomberg. (ARC was not among the companies under scrutiny.) All of the people who spoke to Bloomberg about the CFPB's work asked not to be named to discuss sensitive matters.
In February, however, the Trump administration took steps to gut the CFPB, idling most of its workforce. That effectively halted work on the investigations that sought to hold the zombie debt collectors to account, the people said.
A White House spokesperson who handles CFPB inquiries said the work has not been abandoned but declined to elaborate.
Bloomberg reviewed lawsuits that borrowers brought against ARC and spoke with 32 people in 14 states who dealt with the company. These people described feeling coerced and confused. A widow in Illinois was hit with a demand to repay an old loan, plus $85,000 in back interest. ARC dropped its demand for the back interest only after she asked for basic documentation on the loan that the company was unable to provide. Another, in Virginia, alleged in court that ARC demanded more than $20,000 in back interest and fees. But the company had signed an affidavit saying that no statements had been sent.
Others didn't fight. Fearful of losing their homes, they signed away their rights to challenge the company's claims.
"I couldn't afford a lawyer," said Matthew Kamei, a 60-year-old Liberian immigrant.
So Kamei agreed to pay $10,000 upfront and to make $1,088.19 monthly installments, according to documents reviewed by Bloomberg. Under the terms of the agreement, Kamei would pay interest on top of the interest, with an estimated balloon payment of $133,256.19 due in February 2028.
It was a lucrative deal for ARC. Its internal data show it had bought Kamei's loan from Morgan Stanley for just $3,410 in 2018. ARC later sold the modified loan to another firm.
ARC's attorney, Callahan, initially said that the company could not discuss private borrower information without the borrower's written consent. Later, Kamei and others featured in this story signed CFPB-approved waivers to allow ARC to discuss their mortgages. The company still didn't respond to detailed questions about them.
A spokesperson for Planet Home Lending, which ARC hired to service Kamei's loan, said the company is not currently servicing his debt and could not discuss it because of privacy laws.
Kamei was shocked to learn how little ARC paid for his loan. A counselor at an addiction rehab center, he said he's depleted his savings to keep up with the payments. "I'm barely making it."
Debt collectors tend to keep a low profile. Gordon, the ARC executive, is an exception. He has sat for interviews about zombie mortgages, including one with National Public Radio's "Planet Money" program last year. In his interview with Bloomberg, he said he wanted to come across as reasonable. He added that it's disingenuous that some borrowers now complain about the old loans.
"A debt is a debt," he said. "And if you signed up for something, you should really pay it back."
Gordon had a front-row seat for the lending practices that helped create so many zombie second mortgages in the early 2000s. He worked first at Lehman Brothers and then on the mortgage desk at Morgan Stanley. When the economy tanked, he was out of a job. But he said it didn't take him long to land on the idea of leveraging his Wall Street connections to scoop up non-performing mortgages for cheap.
What he didn't have was a background in collections. So he teamed up with John Olsen, a real estate investor who did. Together, they sought out opportunities to make money. ARC was part of an investor group that took control of a Trump-branded hotel tower in Panama and canceled a contract with the president's firm. The investors pried Trump's name from the building in 2018, garnering international headlines. (Files in the trove of documents obtained by Bloomberg cheekily refer to an investment in "TRUMP PANAMA" as "MAGA01.") Gordon said the company's bet on the building had "nothing to do with Trump or political affiliations."
Mostly, ARC invested in pools of home loans, which began to pay off as housing prices rebounded. From 2015 through 2018, Gordon's net worth rose from $3.8 million to $29.8 million, according to personal financial statements. Olsen's net worth was $44 million by 2018. Olsen did not respond to requests for comment.
Gordon told Bloomberg that ARC follows the law and monitors the servicers it hires to interact with borrowers. Those firms act aggressively, he acknowledged, because they get compensated if they collect. He said it's outside his purview at the company to know whether these firms comply with federal guidelines about sending regular statements.
Internal spreadsheets show ARC calculated interest charges on second mortgages from the last payment date without regard for whether borrowers had been sent statements for all periods. A person familiar with the company's collection practices, who asked not to be identified for fear of retaliation, said many of the people ARC pursued hadn't gotten statements for a decade.
Bloomberg reviewed records on more than 200 mortgages ARC purchased in 2018 from Gordon's former employer, Morgan Stanley. According to documentation, such as servicing notes and past statements that ARC received for those loans, the mortgage servicer hadn't attempted to contact about two-thirds of the borrowers since 2015. In many cases, the last outreach was a repayment demand dated July 2014.
Through a spokesperson, Morgan Stanley declined to comment for this story.
It's unclear how much of the back interest ARC collected from borrowers was in conflict with state or federal laws. But back interest made up a significant share of the firm's anticipated income from second mortgages. Internal data from July 2021 show it estimated nearly 40%, or $262 million, of its revenue from the loans would come from what it described in spreadsheets as "accrued interest."
Borrowers like Viengvilay Weis show how back interest contributed to the company's profit.
The terms of the $24,699 loan reflected the edgier lending practices of the time. It carried an 11.14% rate and had a big balloon payment after 15 years.
After housing prices crashed, Weis did her best to continue paying on her first mortgage, getting help through a federally funded program to keep homeowners in their houses. She said the lender on the second "just disappeared."
In 2018, ARC bought her second mortgage from Morgan Stanley for $1,195, according to ARC's internal records. Within a year, Weis got a letter demanding that she repay the debt, which was about to balloon in October 2020. She didn't have the money. So she began talking with Specialized Loan Servicing, the company ARC retained to work with her, about a loan modification.
The offer, which landed in May 2020, included an additional $28,324.68 in "capitalized arrearages and fees." The new, larger debt would now carry a 3.25% interest rate, meaning she would be paying interest on the back interest that ARC asserted she owed.
Weis didn't seek legal help. Marc Dann, a former Ohio attorney general who now runs a private practice in Cleveland, reviewed documents related to Weis's second mortgage and said ARC's collection practices raise serious concerns. For one, Ohio law bars interest on loans like her second mortgage after more than six years. Legal filings in her foreclosure case show that ARC was seeking at least eight years of payments.
"There are a litany of things we could have done to help her," Dann said.
Weis was skeptical of the terms she was offered but desperate to keep a roof over her family's head during the Covid-19 pandemic, so she didn't consult a lawyer. She signed. Five years later, she said it still bugs her. "It was the perfect storm for these guys to fearmonger people and benefit from it."
A spokesperson for Specialized Loan Servicing, which became part of the mortgage servicer and lender Newrez last year, said it couldn't comment on Weis's case but that it strives "to support its homeowners and service their loans in compliance with all applicable laws and regulations."
Weis said the payments on her modified second loan have made it harder for her to keep up with her first mortgage. Facing a foreclosure on that debt earlier this year, she decided this summer to put her house up for sale.
Records from three loans that ARC purchased from Morgan Stanley in 2018 raise other questions. In each case, Saxon Mortgage, a business that Morgan Stanley used to own, created 1099-Cs. Mortgage experts and attorneys who examined the records said they indicate Morgan Stanley may have sold debts that were fully canceled.
Federal regulators have held banks liable for selling uncollectable debts, known as "dirty paper" -- loans that had been discharged in bankruptcy or otherwise canceled. But it's difficult to know whether Morgan Stanley did so on the loans it sold to ARC without additional details from the bank.
As Scott and Kari Amable would learn, having 1099-Cs is no protection against zombie debt collectors.
The Amables stretched in 2005 to afford their $500,000 home. Back then, lenders were eager to help borrowers with two loans -- a first mortgage to cover most of the cost and a second to help reduce or eliminate the need for a downpayment. The couple liked that their new place was close to Kari's parents and had a good school for their daughter. "It was the cheapest that we could get in the best neighborhood," Scott said. The following year, home prices were still rising so they decided to refinance their second mortgage into a slightly larger one, with Flagstar Bank, to pay for home repairs.
As the economy went into a tailspin in 2008, things began to unravel. Scott, an auto technician, lost hours at work. They couldn't afford to make both mortgage payments, so they decided to stay current on the first. After they fell behind on the second, a law firm representing Flagstar sent a letter in October 2009 saying the loan had been referred for collection. Soon after, the Amables filed for bankruptcy.
Three months later, Flagstar mailed them each a 1099-C for the entire balance. The documents said in large, bold letters: "Cancellation of Debt." The Amables said they filed the forms with their income taxes that year, as required, and the debt stopped showing up on their credit report.
Occasionally, they'd get a letter from a firm trying to collect on the old second loan, even though they don't recall receiving regular monthly statements. Kari Amable, a secretary, had a templated response ready, explaining the debt had been canceled in 2009 and politely asking to stop collection attempts. She attached the 1099-Cs as proof.
It was strange, she said. But with mortgages getting passed around all the time, it seemed plausible that this was just a clerical error.
ARC's internal documents show that what happened to the Amables was no mistake.
In 2016, Flagstar sold the Amables' debt to ARC as part of a pool of hundreds of second mortgages, according to the records. ARC also got a "data tape" detailing information on the loans, including how much was owed in principal and when the last payment had been made.
The filename of the data tape indicates Flagstar had charged off this particular pool of loans. That suggests the bank had taken a loss on the Amables' second mortgage. If Flagstar got a tax benefit by doing so, legal experts said, the loan should never have been sold in the first place.
Flagstar declined to comment.
Though the bank issued 1099-Cs canceling the Amables' loan, Flagstar never released the lien -- that is, the legal claim that secured the loan -- on their house. Then, their bankruptcy lawyer missed a filing deadline, causing their case to be dismissed. Had the bankruptcy gone through, the lien likely would have been erased, according to lawyers who reviewed their case. But because, technically, the lien was still in place in county records, ARC could begin foreclosure proceedings; and since the Amables didn't challenge the foreclosure in court, a judge never had a chance to review their 1099-Cs.
Had the Amables fought ARC's collection attempts in court, the tax document and additional records might have surfaced and shed light on exactly what, if anything, they owed.
Servicing notes show that even some employees at one of ARC's contractors had doubts that the couple owed anything.
"To me, since both borrowers received 1099-Cs, the lien is theoretically forgiven," one collections worker from ClearSpring Loan Services wrote to colleagues in 2017. "No debt is owed, so how can the lien be valid"?
Years went by and the Amables' home rose in value, reaching nearly $600,000 by the end of 2019, according to Zillow estimates. ARC switched to another servicing company, according to its internal records, before transferring the loan to one of its own businesses, Assets Recovery Center LLC, in November 2020.
Days later, in December 2020, the Amables got a notice of default, the first step in most California foreclosure proceedings. They figured the amount ARC said they owed, $198,864.94, was almost certainly wrong.
Had they gone to court over it, they might have found something unusual: monthly statements on Assets Recovery Center letterhead for the Amables stretching back to 2009 -- a full seven years before ARC had even bought their loan.
Gordon declined to respond to questions about why the firm had the statements. Callahan, ARC's attorney, said the firm doesn't comment on specific cases for legal reasons.
Two lawyers who've sued creditors on behalf of borrowers in dozens of zombie cases reviewed the documents at Bloomberg's request. They said mortgage servicers often generate such statements in anticipation of borrowers filing bankruptcies or challenging foreclosures in court, which might require them to prove that statements were sent.
By January 2021, the Amables were scrambling to respond to their default notice. They thought about refinancing, but worried that a new loan wouldn't be enough to pay off the $325,000 or so they still owed on their first mortgage, plus the amount ARC was claiming. Selling the house presented a similar problem. They could end up owing money to leave their home of more than 15 years.
Kari said she tried calling ARC to negotiate but couldn't get through to anyone. "We have left voicemail messages in an attempt to speak with someone about the default, but have received no call back," she wrote in a letter that Bloomberg found in ARC's files. In a last-ditch effort, the couple consulted with a lawyer but decided they couldn't afford his fee.
"Maybe we were just in denial," Kari said.
They didn't bother going to the foreclosure auction. In the end, their house sold on April 12, 2021, for $206,100 to a company called The Little Cat LLC, which would have to pay off the Amables' first mortgage.
"Great news," one of ARC's asset managers wrote to ZBS Law, the firm hired to manage the foreclosure. "ETA on proceeds remittance?"
The house sold for a few thousand dollars more than ARC said it was owed, money that might have gone to the Amables. In a "final twist of the knife," Kari said, ZBS sent the couple a "notice of de minimis excess proceeds," saying it took that money as a fee. The law firm declined to comment.
Months later, Little Cat sold the home for $625,000. By then, ARC had moved on, booking a return that was more than 30 times greater than its investment.
It's been four years, but the whole episode is still raw for the Amables.
They dipped into Kari's retirement savings to buy a trailer. It seemed cheaper to park it somewhere than to rent in the Bay Area.
"It was really hard for me to come here," Kari said on a recent summer evening, at a picnic table outside their new home in an RV park in the Sacramento-San Joaquin Delta. "I've been a city girl all my life."
She still refuses to drive past the old house, taking a different route to avoid passing it when she visits her mom. She's heartbroken that she doesn't have enough room in the RV to have her new grandson stay overnight.
Scott said he likes how peaceful their current living arrangement is and tries to look forward, not back. But the anger wells up in him when he reflects on what happened.
"I've been a blue-collar worker all my life," he said. "These are just thieves with white collars."
