Tipline Investigation: Orcutt Family’s Zombie Loan Nightmare

ORCUTT, Calif. – We have to go back 15 years to the housing crisis, when many people owed more for their home than it was worth. It was called being "upside down," and foreclosures skyrocketed.

So, the government stepped in and offered loan modifications allowing troubled homeowners to refinance their first and second mortgages into one manageable loan.

It seemed to work, but as one Orcutt family found out, one of their old loans has risen from the dead.

The morning of June 21, 2023, Jose Arzate heard a knock at the door. His life was about to turn upside down. Santa Barbara County Sheriff’s Deputies were there to evict them. But, the Arzate’s were not renters, they had owned the home for more than 20 years.

“I said, ‘I have the deed, you want to see it?’ The officer said, ‘No, you don’t have to. You’re not the owner anymore,’” said Arzate during an interview with your News Channel.

Security cameras captured the chaos. 

Deputies gave Arzate, his three children, one who’s autistic, and a grandchild, just five minutes to grab their belongings and get out. His wife was not home at the time.

“My grandson went in there, he was crying and everything. I told him it’s going to be okay,” said Arzate.

Arzate said he pleaded with the deputies and explained he’s one of them. He works for Santa Barbara County as a probation officer.

“They treated me like a criminal, basically, I was treated like a criminal,” said Arzate.

Arzate complied. He left everything they owned at the house and got out.

"I thought it was just a dream I was going through, like, is this happening? What’s going on?” said Arzate.

Arzate immediately called his mortgage company.

“I said, ‘Did you guys sell my house? What happened?’ They go, ‘No, you’re good. You got all of your payments and everything. You’re good,'” said Arzate.

Arzate then started checking the security cameras at his house and spotted a man disconnecting them. That man was Mike Phillips. A real estate agent with All American Realty in Santa Maria and the new owner of the home.

“I think Mr. Phillips made a mistake,” said attorney Daniel Martorella who represents the Arzate family.

“He bought a second trust deed, which was not identified in any of the documents, it doesn’t have to be. But there’s warnings on the documents from the foreclosure company that says be careful what you buy because it may not be what you think it is, and I think that’s what happened here,” said Martorella.

“Can we talk with you on camera?” asked C.J. Ward with your News Channel as Mike Phillips walked out of Santa Maria Superior Court. “No,” replied Phillips.

But, Phillips, who declined to talk on camera, told your News Channel during a phone interview, that he did know he was buying just a second trust deed and probably should not have knowing a first deed was still out there.

What is a second trust deed? In this case, it was a second loan on the house. However, that loan was supposed to be cleared or paid off when the Arzate's modified and bundled their two mortgage loans back in 2010. For the last 13 years, they thought that’s what happened and those old loans were gone forever. But they were wrong. 

The Arzate’s old loan was through a lender called Countrywide, what some consider the poster child of the housing/financial crisis of 2008.

Countrywide paid hundreds of millions of dollars in court judgements, fines and penalties including $335 million for discriminating against Black and Hispanic borrowers.

“I lost everything. I don’t have anything. So painful, It’s like you got kicked out of your house. I mean how can I explain it to my family?” said Arzate.

“So this note floated in limbo for 13 years?” asked Martorella.

Until it came back from the dead, that’s why it’s called a zombie loan or zombie mortgage. What happened to the Arzates is happening across the country. And consider two points, is there a statute of limitation on the debt? Plus, if no one made a payment on that second loan for 13 years, why didn’t the lender foreclose 13 years ago?

“So they waited until the equity built up and then they were somehow going to snatch the equity and this guy thought he could swoop in there and take the equity and leave these guys high and dry. It’s a horrible case. I’m gonna stop it,” said Martorella.

Simply put, the Arzate’s old loan went from a hot potato to a golden egg, not just for the lender that held this second trust deed for years, but for Mike Phillips too.

“It was supposed to be sold at an auction. There was one person, one bidder, one bid a penny over and there was one acceptance. The whole process smells,” said Martorella.

After buying the home at auction for just $145,000, Phillips tried to flip it a few months later for almost $600,000.

The Arzates meantime, are still making the mortgage payments on their house. They can’t afford rent on another place, so they’ve split up with each living with friends and relatives.

“I want the community to know it happened to me and it can happen to anybody,” said Arzate.

We discovered Bank of America, which bought Countrywide in 2008,  sold the Arzate's mortgage in July 2010 to Old Republic Bank. What happened after that is a mystery. But, we know the Arzates still hold the first trust deed on the house which is very important.  

This case is before Judge James Rigali in Santa Maria Superior Court and it's probably headed to trial.

Mike Phillips' buyers backed out of the sale. He told us he's an innocent third party in all of this.

Phillip's attorney also sent us a statement that reads in part, "We intend to vigorously defend the action and prosecute the cross-complaint that we filed on his behalf.  We strongly contend that the action filed against him is devoid of merit and frivolous, replete with unsustainable allegations, and never should have been filed in the first instance."

And finally, the Sheriff's Office said its deputies were just doing their job when they carried out the eviction. 

If you believe you're a victim of a zombie loan, you can contact your News Channel at 805-882-3903. You can also contact the Consumer Financial Protection Bureau for more information.