What Happens If My Mortgage Company Goes Bankrupt?

22 Aug What Happens If My Mortgage Company Goes Bankrupt?

Since the first of the year, more than 38,000 mortgage company employees have lost their jobs, and mortgage lenders are themselves going bankrupt or simply shuttering their businesses, 24,000 of them in the last several weeks, MSNBC.com reports.

America’s largest mortgage lender, Countrywide Financial Corp., began an undisclosed number of layoffs this week. Last week, Arizona mortgage lender First Magnus Financial Corp. shut down its operations and laid off nearly 6,000 workers. On Monday, Capital One Financial Corp. said it would shutter Greenpoint Mortgage, its wholesale mortgage banking business, and lay off 1,900 employees.

“It’s only been weeks,” Challenger said. “These companies are acting remarkably quickly, stopping on a dime.”

So, what if your mortgage is owned by, or serviced by, one of these lenders?   Well, it does not change your obligation to pay the mortgage; after all, lenders sell these mortgages all the time.  Eventually, that is probably what will happen with most of the mortgages owned by these troubled lenders. John Schoen of MSNBC.com explains:

In any case, the terms of your original mortgage, like many such contracts, are almost always fixed and valid no matter who holds the loan. (If you want double check this and see what happens if your mortgage changes hands, dig out the original document and read the paragraphs on “sale or assignment” of your loan.)

(snip)

One of the biggest buyers of mortgages is Fannie Mae (the Federal National Mortgage Association) which was set up by the government to create a market for mortgages, thus freeing up more capital to lend to new borrowers. In some cases, when the loan conforms to established terms and conditions, mortgages bought and sold in the so-called “secondary market” are guaranteed by the federal government.

So your mortgage is like any other bond issued by any other borrower — whether from General Motors or the U.S. Treasury. The value of the bond may change based on the risk that the borrower may not pay it back. That’s why some of the riskiest subprime mortgages are selling for much less that the face amount.

But the terms of your mortgage — like those of other bonds — are fixed in the original agreement. That’s also why — even if your lender goes broke — you’re still on the hook to pay it back to who ever buys it.

Schoen goes on to note that although none of us has the ability to control who services our mortgages, the one thing that may be missing in the current situation is any commitment to customer service.  I would say that is putting it mildly.  It is always a good idea to keep good records of when and how you pay your mortgage, but if your mortgage company or its servicer is in a state of turmoil, it is especially important that you keep good records.  I recommend paying your mortgage by personal check or bank draft if at all possible, which gives you a record of the payment actually clearing your account.  When you pay by money order, or through a third party like Western Union, you may have a record of when the payment was sent, but no record of its receipt.  Trust me, some of them are hard to trace.  Another measure of protections is to mail a payment by a method that gives you delivery confirmation.  Still another idea is to call the company each month and confirm that the payment has been made and properly credited.  If you get a notice that tells you to send your payment to a new company, and you’ve just sent a payment to the old company, call and make sure that it is properly forwarded.  Thiat’s why it helps to have a record that your payment cleared; if it did not, you can stop payment and reissue it.  (I recently had a client object to that because of the $30 fee to stop payment.  Compared to the cost of a fighting a foreclosure, it is well worth the extra cash.)

It has been suggested that the current administration raise the limits on the number of loans that Fannie Mae and Freddie Mac can purchase.  Treasury Secretary Henry M. Paulson, Jr. has so far resisted that idea, which has drawn criticism.  Congressional Quarterly reports:

Sen. Christopher J. Dodd, D-Conn. who met for about 35 minutes with Fed Chairman Ben Bernanke and Treasury Secretary Henry M. Paulson Jr., said Bernanke had assured him the central bank would use “all tools” available to deal with the current crisis. But Paulson, he said, made clear that the administration remains opposed to lifting limits on portfolio assets held by mortgage finance giants Fannie Mae and Freddie Mac.

“It’s important to be vigilant, but also it’s time to act,” Dodd said. He urged the White House to allow the regulatory agency that supervises the giant government-sponsored enterprises to lift the cap on the amount of mortgage debt they can buy. “Liquidity is tremendously important, obviously,” Dodd said.

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Däna (pronounced "Donna") Wilkinson, has been a bankruptcy lawyer in South Carolina for 20 years. She is certified as a bankruptcy specialist by the South Carolina Supreme Court.
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