While it might not be common, banks, like any other business, can close or go bankrupt.
If you have a mortgage and your bank closes, you might be wondering if that gives you a get out of jail free card. Unfortunately, that isn’t the case. You still have to make payments on your loan. Even worse news is that making payments while your lender is going bankrupt can get complicated.
Fortunately, there are protections in place to safeguard mortgage borrowers in the event of a lender or bank failure. Generally, if your loan has already closed and been funded, it shouldn’t be affected if your lender or servicer were to file for bankruptcy or go out of business.
What happens if your mortgage company goes bankrupt after closing?
Because of the way your mortgage is handled after closing, if your lender goes bankrupt or 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 taxes are paid.”
What if the bank goes bust before the closing?
You’re preparing to close on your mortgage, but learn that your lender or bank 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, lenders cease to underwrite loans if they approach insolvency.
“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 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.”
What you can expect if your mortgage lender fails
Again, if your mortgage lender fails or files for bankruptcy, nothing should change for you personally. All of your loan terms will remain the same. Taylor cautions, however, that you will not get any advance notice that your lender is in trouble.
“They’re not going to tell you because that’s just bad for business,” Taylor says.
You might eventually receive mail explaining the changing of hands, though, 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.”
Do you still pay your mortgage lender if they go 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.
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.