Newrez faces another zombie-seconds class action filing

Newrez subsidiary Shellpoint Servicing finds itself at the center of another class action lawsuit surrounding the attempted collection of a second "zombie" mortgage originated prior to the Great Financial Crisis. 

In documents filed in a Virginia federal court in late October, attorneys for former homeowner and plaintiff Mariel Castellon claimed the company made attempts this decade to collect on interest for a piggyback zombie-second lien that had been discharged years earlier by a different servicer. The operation ensued even after Castellon twice declared bankruptcy, with the home eventually foreclosed upon last year.   

Administration of the loan was previously handled by Specialized Loan Servicing, which was acquired by Newrez parent, Rithm Capital, in a deal that closed in early 2024. Shellpoint illegally kept up collection efforts post acquisition, the legal filing claimed, while the current owner of the loan in question, Gulf Harbour Investment Corp., was also named as a defendant.  

"The members of the enterprise and Gulf Harbour enterprise knew that the objective of the enterprise was unlawful, as they knew from their own internal business records that the subject loans had been onboarded by SLS with a 0% interest rate," according to the complaint filed by the plaintiff's attorney. 

"SLS's scheme to collect retroactive assessment of interest was conveniently timed with the rise in home prices following the Covid-19 pandemic, which caused the available equity in homes to skyrocket and thus rendered collectable through foreclosure the thousands in additional equity that SLS now claimed was owed," the lawsuit also said. 

Gulf Harbour claims Castellon currently owes it at least over $280,000 from the lien, which includes nearly $173,000 in retroactive interest accrued between 2008 and 2024. 

History of the zombie loan in question

Castellon took out an 80/20 piggyback mortgage in 2005, a borrowing strategy used by some buyers prior to the Great Financial Crisis to help lower down payments or eliminate certain requirements associated with a single loan for the full balance. 

Called piggyback mortgages, borrowers would take out a second lien for 20% of the value, secured by the property, on top of the primary loan. In Castellon's case, the piggyback second origination totaled $122,000. 

She later fell behind on the junior lien, which eventually led to Ocwen Financial Corp., the servicer at that time, to accelerate and charge off the loan. Ocwen and the lien's prior owner subsequently set the interest rate of the second mortgage at 0%.

The homeowner later declared bankruptcy in 2021, and during proceedings SLS laid out a claim that she owed $11,000 in interest on the remaining zombie second principal of $116,000 at that time. 

Following a second bankruptcy in 2023, SLS again filed a proof of claim, where interest owed had ballooned to $143,000, and the total balance due surpassed $258,000. 

Castellon eventually lost her home to foreclosure on the primary mortgage last year, where defendants moved to collect on the amount they claimed she owed on the junior lien. However, Gulf Harbour failed to produce the original note to the foreclosure trustee, the document stated.   

According to the lawsuit, the alleged infractions encompass mail and wire fraud and run afoul of the Racketeering Influenced and Corrupt Organizations Act. Lawyers are also suing Newrez and Gulf Harbour for violations of the Real Estate Settlement Procedures Act after failing to respond to the plaintiff's write request for information and Virginia state regulations. 

The plaintiff aims to represent a class of consumers numbering in the hundreds, if not thousands, of Virginia homeowners, "each of whom is entitled to damages for the amount of retractive interest assessed by defendants under their deceptive scheme." Castellon is seeking both injunctive relief and actual damages and costs tied to the violations for the class. 

Other Shellpoint zombie litigation

A Newrez spokesperson said the company was unable to comment on active litigation, but the Virginia lawsuit is the latest of at least four class actions in the last year lodged by homeowners for attempted collections made by SLS on discharged zombie loans.

In other cases, plaintiffs accused the servicer of violating the Truth in Lending Act laws in not providing regular statements on accruing interest, among other claims. 

The new lawsuit also arrives just months after new California rules went into effect prohibiting collections on subordinate liens under certain circumstances when the holder or servicer of the loans become noncompliant in borrower communications. A coalition of home finance industry parties, including the California Mortgage Association, is currently suing the state to halt enforcement. 

Heightened attention and resumption of attempted collections on zombie second mortgages emerged earlier this decade as home prices quickly soared and sent the value of the formerly secured properties surging. State officials from around the country have responded in the past 12 months both with enforcement action and the passage of new consumer-protection laws.