Banks, like any other business, can close or go bankrupt. And while it doesn’t happen often, when it does it can send shock waves throughout the financial world. Case in point: the banking crisis over the weekend of March 10, when the failure of first Silicon Valley Bank and then Signature Bank led to sharp drops in the stock market and in mortgage rates.
It’s natural to wonder what happens to you and your loan if your mortgage company goes bankrupt. The fallout will vary depending on exactly where you were in the mortgage process.
What happens if your mortgage company goes bankrupt?
What does a mortgage company collapse mean for your personal financial world? You might be wondering if that gives you a get-out-of-jail free card. Unfortunately, the answer is no. You will still have to make payments on your loan.
Generally, if your loan had already closed before the bankruptcy occurred and you’ve received the funds, your loan shouldn’t be affected at all. Typically, as part of the bankruptcy process, another institution will take over the debt. The good news is that any repayments you already made won’t get “lost” or wiped off the books. All of the information about your 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 experiences bankruptcy or goes out of business — whether it be the company that originated the loan or a third party that later bought it — it should have no impact on you or your loan.
“The borrower is never informed about the lender’s financial problems,” explains Christopher Burgelin, owner of We Buy Houses Fast, LLC, in Austin, Texas. “If the bank’s charter is in jeopardy, the bank’s insurer or regulatory agency will step in to take over. This takeover typically ends with the FDIC inducing another lender to take on that bank’s loans.”
If your mortgage were to be taken over by another bank or lender, the servicing of the loan would become the new owner’s responsibility. Generally, the servicer or institutional investor servicing your loan is unlikely to go bankrupt, notes Bruce Ailion, an Atlanta-based real estate attorney and Realtor.
“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 a notification confirming the change from both the old servicer and the new servicer. This notice will include information on where to send your payment.
“Your balance will stay the same, and your amortization will remain the same,” Burgelin says. “Your responsibilities will remain unchanged. You’ll need to pay your mortgage on time, keep the property insured and make sure your [property] taxes are paid.”
When your mortgage lender goes bankrupt before the closing
You’re preparing to close on your mortgage, but hear that your lender is in dire financial straits. Should you start sweating?
The short answer is no. According to Ailion, “any funds you have transferred to an escrow agent should be secure if your prospective lender gets into trouble, but you will have to find a new lender to get a loan.”
Typically, if a mortgage lender is going broke it will cease to underwrite loans. But if your financing has already been approved, getting a new lender might not be that hard, 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 recalls. “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 goes bankrupt, you still have to pay your mortgage. As part of the bankruptcy proceedings, your loan will likely be sold off to another company and they’ll expect you to continue payments.
If you do stop paying your mortgage, you could put yourself at risk of foreclosure by whoever winds up owning your loan after the bankruptcy proceedings finish. They might cut you a little slack if a payment is late, given the delays that can happen during a changeover; grace periods are standard. But don’t try to take advantage of the situation by deliberately being tardy.
How to find out who holds your mortgage
If you’re unsure of who owns your mortgage, you can look your loan up online via Fannie Mae or Freddie Mac, call your mortgage servicer or send a written request to your servicer requesting the name of your mortgage owner. (Download a sample letter you can customize and send to your servicer.) The servicer is required by law to provide you, to the best of its knowledge, the name, address and telephone number of the party that owns your loan.
Don’t be surprised if the name is different from that of the institution you applied to and got approved by. Mortgages change hands all the time: It’s quite common for the loan originator — the one who actually gave you the funds — to sell the debt. That’s how they live to loan another day.
How to deal with your new mortgage lender
While you probably won’t get any advance notice that your lender is in trouble — telling you is just bad for business — you should eventually receive mail explaining the changing of hands, says Ethan Taub, CEO of Debtry.
“It would be good practice to at least have a phone call with your new lender,” recommends Taub. “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 files for bankruptcy, nothing should change for you personally. All of your loan terms — your interest rate, monthly payment and remaining balance — will remain the same. But when you chat with the new lender, double check the procedure for making payments — if you do auto-pay, you may well have to rejigger a few things — and the address. Check that your account is current, as well. Any payments you’ve made during the handover should be forwarded to the new lender, but you don’t want anything getting lost in transit.
— You still have to make your mortgage payments, but all terms should stay the same
— If your loan is active or has just closed, it’ll be sold off to another company
— If you’re in the midst of closing a loan, any escrow funds should be safe, but you’ll have to find a new lender
— If your loan servicer changes you will receive notice, and you should chat with them
Additional reporting by Mia Taylor
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