With all the underwater homes out there,  there are a lot of second mortgages that are in effect unsecured loans.  Now it sounds like debt collectors in New York [a recourse state] are treating them as such:

Josh Zinner of the Neighborhood Economic Development Advocacy Project in Manhattan said some lenders or trusts for banks that went out of business are selling off second mortgages today to debt collectors for pennies on the dollars. Those debt collectors are then going after the homeowners’ bank accounts or pay checks to recoup whatever money they can.

This can create problems for borrowers who are trying to modify loans. Take for example this case:

[A]n Arden Heights woman who was talking to her bank about modifying the loan on her first mortgage. Then a debt collector, which bought the second mortgage on the house, won a judgment to garnish 10 percent of the woman’s paycheck. That has jeopardized a good shot at a loan modification.

One of the big issues in this push by debt collectors to go after these homeowners is whether these mortgage holders have been properly notified:

Lawyers for troubled Staten Island homeowners say they are beginning to see examples of clients who go to the bank to take out money and find that their accounts have been frozen or wiped out by other banks or debt collectors — the entities holding second mortgages on houses already in default on the first and primary mortgage. Some are learning the lender or debt collector has already gone to court and secured a judgment to garnish paychecks.

Improper notification of court dates has become a big problem in New York:

Perhaps in part because they are not notified, people sued in New York City often fail to appear in court to protect their interests, according to a study released last year by MFY Legal Services, a nonprofit law firm in New York.

MFY found that just seven law firms filed nearly one-third of all the cases seeking to collect $25,000 or less in New York City’s civil courts. Fewer than 10 percent of the defendants in those cases appeared to defend themselves.

“Then there are these high number of default judgments rates,” said Carolyn E. Coffey, a staff lawyer at MFY and an author of the study. She said she was mystified that problems with getting notice could go unaddressed.

“Part of the problem is the business model of these debt collection lawsuits,” Ms. Coffey said. Creditors often have bought the loans from another financial company, she said, and then hired companies that specialize in collections to notify people of lawsuits.

The payment for delivering notice of a lawsuit may be just $5 for each successful assignment, Ms. Coffey said, creating an incentive to engage in “sewer service,” where the delivery person simply tosses the court notice in the sewer and claims that the defendant was notified.

Improper notification isn’t the only problem however.  Many defendants fail to respond:

While it may seem obvious that a foreclosure action can result in the loss of the subject property, the reality is that historically, many homeowners do not file answers to foreclosure complaints. With the new laws, the legislature and courts seek to emphasize the need for homeowners to take quick action by filing and serving an answer to the foreclosure complaint. The hope is to give homeowners, particularly those who are burdened with subprime loans, a chance to stop foreclosure and reach an alternative solution not involving the loss of their properties.

Josh Zinner of the Neighborhood Economic Development Advocacy Project in Manhattan says of the situation:

The backdrop to that is there are real fundamental problems in the debt buyer industry. The combination of the second mortgage problem with all the abuses in the debt collection industry is toxic, and could really create havoc for homeowners who are trying to avoid foreclosure on their primary mortgage.