Attack of the zombie mortgages

This post comes from Marilyn Lewis at MSN Money.

How's this for a nightmare: You refinance and pay off your old mortgage. Or so you think. All seems well until you learn there's no record that the old mortgage was paid off. Now, the bank says, you have to pay both loans.

That's one scenario described by Reuters in "Old mortgages rise from the dead, haunt homeowners." Mortgages that will not die are becoming increasingly common, the article says.

Reuters says "reincarnated" mortgages are a hangover of "sloppy" bank recordkeeping from the housing boom. "Wall Street built a quick-and-dirty back-office operation to process mortgages quickly so lenders could sell as many loans as possible," the article says.

How many of these zombie mortgages are there? No one knows. Reuters says more cases are cropping up, though, in which banks refuse to recognize:

• Loans paid off through refinancing.
• Paid-up mortgages.
• Payments made through bankruptcy arrangements.

In some cases, banks have even gone after people who've never owned a mortgage, the article says.

Nightmare tales

Among the tales the article recounts:

Shantell Curtis, Utah

Curtis, whose town was not named, reportedly was sued for foreclosure on a home she sold years before; a coding error caused Bank of America to report her delinquent to a credit agency. The unpaid claim amount: $1. Post continues below.

Dwight Gaines, Birmingham, Ala.

Gaines defaulted on mortgage payments but then paid off the entire loan, including fees and expenses, in Chapter 13 bankruptcy in March 2010, Reuters reports.

But Bank of America kept sending Gaines notices that he still owed $6,842.37. Nearly two years later, Gaines is still fighting the bank in court.

Bank of America is working on fixing Gaines' problem, a representative told Reuters, adding that "these situations (Gaines' and Curtis') predate a review of our foreclosure procedures, which took place in the fall of 2010." Since then, procedures have improved.

Jennifer Wilson, Philadelphia

Wilson settled a wrongful foreclosure with Wells Fargo in June 2010. After that, though, she's been served with debt-collection letters from Wells threatening foreclosure.

A bank spokesman said Wells is trying to help Wilson resolve the problem "as quickly as we can."

"We see a lot of cases like this, where they are trying to collect even though there is no mortgage," said Wilson's lawyer, Jennifer Schultz.

"Once the system has marked you as delinquent, there's just this massive machinery that takes over. There are people whose lives are destroyed by the system, and there's no way to fix it."

Will government probes help?

President Barack Obama, in his State of the Union speech on Tuesday, announced that he was launching a new probe of mortgage problems and fraud.

But it's unclear if allegations like these -- of loan errors that will not die -- will be among its targets. Obama described the group as

a special unit of federal prosecutors and leading state attorneys general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis. This new unit will hold accountable those who broke the law, speed assistance to homeowners and help turn the page on an era of recklessness that hurt so many Americans.

The Los Angeles Times reports that a major goal of the new unit will be busting loan fraud. Bloomberg says the probe will focus on abuses leading up to the crash, not ones that happened afterward.

On the other hand, post-crash bank errors and sloppy loan processing that affect consumers is the focus of negotiations going on since 2010 among state attorneys general, federal officials and five large banks, says Bloomberg.

A deal reportedly is near. It could entail "nearly $20 billion (to be) used for principal reduction and refinancing programs for borrowers in danger of foreclosure, with another $5 billion reportedly going to those directly affected by the violations," reports HousingWire.

More on MSN Money:

• Bank of America building faces foreclosure
• Today's lowest mortgage rates
• Pay off your mortgage in 2012?
• Calculator:Should I refinance?
• Robo-signing: No real victims?
• Converts sing praises of credit unions