Preapproved, then your lender goes bankrupt
By Dana Dratch • Bankrate.com

Good news: You're preapproved for a mortgage. Bad news: The lender that approved you just went bust.

Now what?

"Ordinarily, the consumer does not have a lot of recourse if the lender goes under," says Donald C. Lampe, chairman of the American Bar Association's consumer financial services committee and partner with Womble, Carlyle, Sandridge and Rice in Charlotte, N.C.

Even if your lender is filing for bankruptcy, that doesn't necessarily mean you have to go back to square one. In some cases, other lenders are stepping in to pick up the business.

First, call your lender. "Ask, 'Are you going to be able to make my loan?' " says Joseph M. Kolar, member of the ABA's consumer financial services committee and partner in Washington, D.C.-based Buckley Kolar LLP. If not, ask whether the company can make arrangements to hand you off to another lender.

If you can't get through to the lender, call your state banking regulator and ask if any other lenders are stepping in to take these loans, Kolar says.

If you went through a broker, the broker should be working to find a replacement. "The challenge is really for the broker to be able to quickly find another lender," Lampe says.

Ask why the broker put you with this company in the first place. Was the company not divulging its financial situation, or was your broker simply unaware?

If you strike out, chances are you will be reshopping your loan. Reminder: Be careful of what can happen with your credit score.

"I would advise any consumer, just as you need to know what the terms of your loan are, you need to have a heightened level of awareness to the market we're in," Lampe says. "Shop around is the main thing. Don't just go to one mortgage broker; don't just go to one commercial lender."

In terms of actual lender bankruptcies, wholesale lenders (who service the brokers and lending institutions) are the ones feeling the greatest impact, says Lampe. "They are the ones who are going into bankruptcy," he says.

Are you still preapproved?
Even if your lender isn't insolvent, that preapproval in your hand might not mean what you think. In some cases, lenders are discontinuing risky or so-called "exotic" loans or even changing their underwriting requirements. So while you may have qualified for a loan under the old rules, you might not under new guidelines.

"With a number of lenders pulling back on their underwriting, they may have changed their standards," says Allen Fishbein, director of housing and credit policy for the Consumer Federation of America.

If so, what's that preapproval promise worth? Are you going to have a problem with the seller?

"That would depend on the nature of the mortgage contract," says Fishbein. "It's a question that is new, but one I imagine is cropping up in this environment."