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What Happens if your Mortgage Lender goes Under?

What Happens if your Mortgage Lender goes Under?

10/17/2007

NEW YORK – Another well-known mortgage lender is in serious trouble. This time American Home Mortgage Investment Corp. may be forced into insolvency after creditors pulled the plug amid a worsening housing slump.

But what does it mean for borrowers when a lender goes bankrupt?

Some questions and answers about whether and how troubles at a lender could affect homeowners.

Question: What happens to my mortgage if my lender goes bankrupt?

Answer: When a lender goes under, it does not mean its assets – in this case home loans – are worthless. The company, under court supervision, would sell the assets and use the proceeds to repay its creditors.

That means your loan would wind up with another financial institution.

“Generally, the consumer is not going to be affected,” said Ray Hooper of the Consumer Credit Counseling Service of Greater Dallas.

But it is unlikely that your originator still owns your mortgage anyhow.

Q: Wait, so who does own my mortgage?

A: That is nearly impossible to say – and it doesn’t really matter to you as a homeowner.

While it is possible the bank you dealt with still has your mortgage on its books, most lenders simply originate loans. They then package them together and sell them to a bank in a bundle.

In many cases, that bank repackages a group of bundles and sells them to the securities markets as mortgage-backed bonds or other complex financial instruments. So your $250,000 loan could be just a small fraction of a $500 million bond, shares in which are held by hundreds or thousands of investors.

In the end, though, “whoever holds the loan is still going to have to honor the terms of the contract,” said Lauren Saunders, a lawyer with the National Consumer Law Center.

Q: Is there a chance that I would have to pay back the loan early?

A: No, your mortgage is a binding contract. If it stipulates repayment over 30 years, then you still have 30 years from the start date.

“No one is going to lose their home because the lender goes bankrupt,” said Hooper.

Q: If the company goes bankrupt, can I stop repaying?

A: No. As the counterparty to the same contract, you agreed to repay the loan over a fixed period. Since someone still owns that loan, you must honor that contract, Saunders said.

Q: What if I pay a different company than the one I borrowed with?

A: If the company that sends you statements and collects your monthly payments is different from the owner, you are dealing with what is known as a loan servicer. If you have a servicer and the originator goes under, you may not even notice, Saunders said.

The servicer can change for any number of reasons, none of which change the terms of the contract.

By Jeremy Herron, Associated Press

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