What happens if your mortgage company goes bankrupt?
Bankrate.com (TNS) Erik J. Martin
Banks, like any other business, can go out of business or go bankrupt. And, while it doesn’t happen very often, when it does, it has the potential to send shockwaves throughout the financial world. Consider the weekend of March 10, when the failures of Silicon Valley Bank and then Signature Bank caused sharp drops in the stock market and mortgage rates.
It’s natural to be concerned about what will happen to you and your loan if your mortgage company fails. The consequences will vary depending on where you were in the mortgage process.
What happens if your mortgage company goes bankrupt?
What does the failure of a mortgage company mean for your personal financial situation? You might be wondering if that gives you a free pass from jail. Regrettably, the answer is no. You will still be required to make loan payments.
In general, if your loan was closed prior to the bankruptcy and you received the funds, your loan should be unaffected. Typically, another institution will assume the debt as part of the bankruptcy process. The good news is that any previous repayments will not be “lost” or wiped off the books. Your entire mortgage history will be transferred to the new financial institution or loan servicer.
When your mortgage lender goes bankrupt after your loan closes
Because of the way your mortgage is handled after closing, if your mortgage lender declares bankruptcy or goes out of business — whether the company that originated the loan or a third party that later purchased it — you and your loan should be unaffected.
“The borrower is never informed about the lender’s financial problems,” says Christopher Burgelin, owner of Austin-based We Buy Houses Fast, LLC. “If the bank’s charter is threatened, the bank’s insurer or regulatory agency will take over.” This takeover usually results in the FDIC convincing another lender to take on the bank’s loans.”
If your mortgage is taken over by another bank or lender, the loan servicing becomes the responsibility of the new owner. According to Bruce Ailion, an Atlanta-based real estate attorney and Realtor, the servicer or institutional investor servicing your loan is unlikely to go bankrupt.
“But if they get into trouble, they will sell your loan or servicing rights to someone else,” Ailion says.
If your loan servicer changes, you will receive confirmation from both the old and new servicers. This notice will include instructions for sending your payment.
“Your balance will remain the same, as will your amortization,” Burgelin says. “Your responsibilities will not change.” You’ll need to make sure your mortgage is paid on time, that the property is insured, and that your [property] taxes are paid.”
When your mortgage lender goes bankrupt before the closing
You’re about to close on your mortgage when you learn that your lender is in financial trouble. Should you begin to perspire?
The simple answer is no. “Any funds you have transferred to an escrow agent should be secure if your prospective lender gets into trouble,” Ailion says, “but you will have to find a new lender to get a loan.”
When a mortgage lender goes bankrupt, it usually stops underwriting loans. However, if your financing has already been approved, finding a new lender may not be as difficult as it once was, thanks to today’s more standardized underwriting guidelines and methods.
“Back in 2008, a few lenders did file for bankruptcy protection post-loan approval and pre-closing, and the borrowers on these loans had to scramble to move their loan to a new lender,” Burgelin explains. “Thankfully, because most loans [now] are typically underwritten by Fannie Mae, Freddie Mac, or FHA guidelines, the appraisal you already had done can be shifted over to a different lender for the same loan type.”
Do you still pay your mortgage lender if it goes bankrupt?
Yes, even if your lender declares bankruptcy, you must continue to pay your mortgage. Your loan will most likely be sold to another company as part of the bankruptcy proceedings, and they will expect you to continue making payments.
If you stop paying your mortgage, you may face foreclosure by whoever ends up owning your loan after the bankruptcy proceedings are completed. Given the delays that can occur during a changeover, they may be lenient if a payment is late; grace periods are standard. But don’t try to take advantage of the situation by being deliberately late.
How to find out who holds your mortgage
If you don’t know who owns your mortgage, you can look it up online through Fannie Mae or Freddie Mac, call your mortgage servicer, or send a written request to your servicer requesting the name of the mortgage owner. (You can download a sample letter to customize and send to your servicer.) The servicer is required by law to provide you with the name, address, and phone number of the party who owns your loan, to the best of its ability.
Don’t be surprised if the name differs from that of the institution to which you applied and were accepted.Mortgages are constantly changing hands: it’s common for the loan originator — the person who gave you the money — to sell the debt. They live to lend another day in this manner.
How to deal with your new mortgage lender
While you are unlikely to receive advance notice that your lender is in trouble — telling you is simply bad business — you should eventually receive mail explaining the transfer of funds, according to Ethan Taub, CEO of Debtry.
“It would be a good practice to at least have a phone call with your new lender,” Taub advises. “This way, you can learn more about them and any changes in how they operate regarding receiving payments, making accelerated payments if you choose to do so, and other matters you have questions about.”
Again, if your mortgage lender fails or declares bankruptcy, nothing will change for you. All of your loan terms will remain the same, including your interest rate, monthly payment, and remaining balance. However, when you speak with the new lender, double-check the payment procedure — if you use auto-pay, you may need to rejigger a few things — and the address. Check that your account is also up to date. Any payments made during the handover should be forwarded to the new lender, but nothing should be lost in transit.
Key takeaways
— You must continue to make mortgage payments, but all terms should remain the same.
— If your loan is currently active or has recently closed, it will be sold to another company.
— If you are in the process of closing a loan, your escrow funds should be safe, but you will need to find a new lender.
— If your loan servicer changes, you will be notified and should speak with them.
