Lender failure won’t affect mortgage

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Dear Dr. Don,
If you had a mortgage with a bank — either residential or commercial — and the institution failed, would the bank call in the loan immediately? 
— Peggy Predicament

Dear Peggy,
No, the lender would not call in the loan. The loan is an asset of the lender, and that asset would be sold to an investor. That said, commercial loan agreements can have language that allows the lender to call the loan, but it certainly wouldn’t be the norm.  

Here’s what the Federal Deposit Insurance Corp. says in its publication “When a Bank Fails — Facts for Depositors, Creditors, and Borrowers“:

What happens to my loan now that my bank has failed?

Either the FDIC sold your loan at closing or the FDIC has retained it temporarily. In either case, your obligation to pay has not changed. Within a few days after the closure, you will be notified by the FDIC, and by the purchaser, as to where to send future payments.

In the case of a delinquent loan, the FDIC will “set off” the loan against the borrower’s deposits (if any) before paying deposit insurance. In the case of a non-delinquent loan, the depositor might elect to “set off” the loan against his/her deposits in order to receive full value for any uninsured funds (i.e., funds in excess of the $100,000 insurance limit). In either case, no “offset” is possible unless the obligations are “mutual” – meaning that the borrower and the depositor must be the same person or legal entity acting in the same legal capacity.

What happens if the FDIC sells my loan?

Loans are negotiable instruments that are routinely sold in the financial markets. When a loan is sold, the borrower retains all the rights and obligations associated with the note. The borrower will be notified by the new holder of the note and given payment instructions

In a bank failure, the FDIC tries to find an “assuming institution” that will take on the deposits of the failed bank. It also attempts to find an assuming institution or institutions for the failed bank’s assets. It may have to split the assets up to multiple purchasers.

The following excerpts from the Aug. 1, 2008, FDIC press release “SunTrust Bank Acquires the Insured Deposits of First Priority Bank, Bradenton, Florida” illustrate both types of transactions.

First Priority Bank, Bradenton, Florida, was closed today by the Commissioner of the Florida Office of Financial Regulation, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with SunTrust Bank, Atlanta, Georgia, to assume the insured deposits of First Priority.

SunTrust agreed to assume the insured deposits for no premium. In addition to assuming the failed bank’s insured deposits, SunTrust Bank will purchase approximately $42 million of the failed bank’s assets. The assets are comprised mainly of cash, cash equivalents and securities. The FDIC, however, entered into a separate agreement with LNV Corporation, Plano, Texas, to purchase $14 million in First Priority’s assets. LNV Corporation is a subsidiary of Beal Bank Nevada, Las Vegas, Nevada. The FDIC will retain the remaining assets for later disposition.

Although it’s a bit perplexing, borrowers don’t have to worry about an established loan coming due because their lender failed.