What Happens When Your Mortgage Lender Goes Out of Business

Since we had the subprime problem, many mortgage companies went bankrupt. The largest mortgage lender in the country Countrywide Financial (CFC) announced today that they drew down their entire $11.5 billion credit line. The analogy for this move in personal finance is like a person who normally uses credit cards only for convenience all of sudden maxing out ALL of their credit cards.

It’s a signal of distress. The credit lines are supposed to be a backup. They are there but you are not supposed to use them unless there’s something seriously wrong. There’s talk of bankruptcy. Usually before someone goes bankrupt, they draw down all their credit lines. WorldCom did the same to their $2.65 billion credit line in 2002, about 2 months before it filed for bankruptcy. The credit line draw down from Countrywide today is more than 4 times as large as what WorldCom did.

I’m not saying Countrywide will go bankrupt. I don’t know that. But one can’t help but ask what happens when your mortgage lender goes out of business. I wrote about what happens when a bank goes out of business in February. That was from a depositor’s point of view. What if you are a borrower?

First the bad news. You will not be let off the hook on your mortgage. Even if the lender goes out of business, you are still responsible for paying your mortgage. Someone else will take over the bankrupt company’s assets (the loan to you) and demand payments from you. If you don’t pay, they will take your house. Sorry, you are not going to get a reprieve.

Now the good news. Your loan term will not change. If you have a fixed rate mortgage, your rate will remain fixed. If you have an ARM, it will adjust according to the index and the original schedule. You may have to send your payment to a different place, but as long as you pay by the original loan terms, nobody can change the terms on you and force you to pay more. Nobody can call in the loan and force you to refinance either.

In the end if your mortgage lender goes out of business, it’ll be a non-event for you for the most part. You will not benefit from it. Nor will you be negatively impacted financially. Tax reporting may get a little messy. The bankrupt company may not issue the 1098 form timely. Your loan may get punted from one place to another. There’s not much you can do about that. Just keep your eyes on payment notices. Keep paying your mortgage and send your payments to the right place.

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