Key takeaways
- If your mortgage company goes bankrupt, you'll 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.
Like any other business, banks and mortgage companies can fail or go bankrupt, sending shock waves throughout the financial system. Case in point: the March 2023 banking crisis, when the failure of first Silicon Valley Bank and then Signature Bank led to sharp drops in the stock market and in mortgage rates. But what about the shock to your personal finances, in the unfortunate event that your mortgage lender goes bankrupt?
The fallout will vary depending on exactly where you were in the mortgage process. Generally, if your mortgage has already closed and you’ve received the funds, your loan shouldn’t be affected at all. If it hasn’t, things could get more complicated.
What happens if your mortgage company goes bankrupt?
If your mortgage company goes into bankruptcy, you might be wondering if that gives you a get-out-of-jail-free card. Unfortunately, the answer is no. For you, it’s business as usual: You will still have to make payments on your loan. And make them on time.
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 terms.
In fact, you might not even know about the failure while it’s happening. “The borrower is never informed about the lender’s financial problems,” says 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.”
If the insured bank or credit union does indeed go into bankruptcy, its governing agency will come in to manage the company’s assets – including mortgages. For banks, this is the Federal Deposit Insurance Corporation (FDIC). For credit unions, it’s the National Credit Union Administration (NCUA).
This takeover typically ends with the agency inducing another lender to take on the failed one’s loans, Burgelin notes. Your mortgage will likely be sold to another financial institution. If so, the new owner must communicate this change to you within 30 days of the transfer date, according to the Consumer Financial Protection Bureau (CFPB).
If another bank or lender takes over your mortgage, the loan’s servicing would become the new owner’s responsibility. Generally, the servicer or institutional investor servicing your loan is unlikely to go bankrupt, says 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,” says Ailion.
As with a new lender, 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.
But this administrative change is really the only one. “Your balance will stay the same, and your amortization will remain the same,” says Burgelin. “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. Of course, collapses can happen quickly. 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 had to scramble to move their loan to a new lender,” says Burgelin. Today, “thankfully, because most loans are typically underwritten by Fannie Mae, Freddie Mac or [according to] 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 mortgage lender’s 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 or making incomplete payments.
Steps to protect your finances if your mortgage lender goes bankrupt
If you find out that your lender has gone bankrupt, don’t panic. For borrowers, these types of takeovers are often pretty seamless. Still, it’s important to stay on top of the situation. This means:
- Keep making payments. Even while things are in flux, your obligation to pay your mortgage remains the same. If you don’t, you could be giving the new lender grounds to foreclose.
- Stay tuned for updates. You should receive details about the future of your loan, including information about your new lender and where to send payments. Look out for mail, email, texts or phone calls regarding these updates, so you don’t mistakenly miss a payment.
- Set up a new online account. If you make your mortgage payments online, you may need to create an account with your new lender or servicer. After setting it up, keep an eye on your account to make sure your payments go through.
- Contact your lender with any questions. Don’t hesitate to reach out to your lender if you’re unsure about what the bankruptcy means for your mortgage. If you don’t hear back, you have the ability to file a complaint with the CFPB.
How to find out who holds your mortgage
If you’re unsure 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. (The CFPB has a downloadable 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.
Other reasons your mortgage could be sold
While they are often due to financial distress, bankruptcies are not the only reason your mortgage could be sold. There are limits in place that restrict how much a bank is able to loan based on its deposits. If the bank needs to balance its books, it could sell off your mortgage to make room for additional loans and credit lines. Or it could do so simply to raise capital or ready cash. In fact, the majority of loan originators — the institutions that actually give you the funds — sell their mortgage 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 financial trouble, you should eventually receive mail explaining the changing of hands, says Ethan Taub, CEO of Goalry, Inc, a financial advice platform. Some things you can do to help make the transition smoother for yourself include:
- Call your lender: “It would be good practice to at least have a phone call with your new lender,” says 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.”
- Check your account: When you chat with the new lender, check that your account is current, as well.
- Confirm payments: 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.
- Check payment procedures: Double-check the procedure for how to make your mortgage payments to the new lender. For example, if you prefer to pay via auto-pay, make sure you’re all set up to do so with the new lender. If you prefer to mail payments, confirm the new lender’s address.
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. Still, be sure to contact your new lender and confirm new payment and loan procedures to make sure you are on the same page going forward. And hang onto the original documents and the final statements from your old lender, for easy comparison — just in case.
Additional reporting by Taylor Freitas
