What Happens If Your Mortgage Lender Goes Bankrupt?

If your mortgage lender files for bankruptcy, your home and loan are generally not jeopardized. While the situation may introduce some administrative changes, the fundamental mortgage agreement and the status of the home generally remain stable.

Your Mortgage Obligation Remains

The bankruptcy of a mortgage lender does not extinguish your debt. Your mortgage is a legal obligation that persists regardless of the lender’s financial status. Your mortgage loan is an asset that can be sold or transferred, a standard practice in the financial industry.

When a mortgage lender or servicer faces bankruptcy, its assets, including all outstanding mortgage loans, typically become part of the bankruptcy proceedings. These assets are then sold to other financial institutions to help satisfy the bankrupt entity’s creditors. Your responsibility to make payments continues, though the recipient will eventually change. Failing to continue payments could lead to serious consequences, including potential foreclosure by the new loan owner.

Transfer of Loan Servicing

When a mortgage lender or servicer goes bankrupt, the responsibility for managing your loan, known as loan servicing, is typically transferred to another company. This transfer ensures that the collection of payments and management of escrow accounts continue without interruption. If an insured bank or credit union enters bankruptcy, a governing agency like the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA) for credit unions steps in to manage the assets, including mortgages.

Borrowers are legally entitled to notification when their loan servicing is transferred. Under federal regulations, both the transferring servicer and the new servicer must provide written notice of the transfer. The transferring servicer generally must send notice at least 15 days before the effective date of the transfer, and the new servicer must send notice no more than 15 days after the effective date. In cases of servicer bankruptcy, the new servicer may have up to 30 days after the effective date to provide notice. These notices should include the effective date of the transfer, the new servicer’s name, address, and contact information, and details about where to send future payments.

During the transition, particularly for a period of 60 days after the transfer, borrowers are protected from being charged late fees if they mistakenly send a payment to the old servicer. The old servicer is then obligated to forward the payment to the new servicer. Escrow accounts, which hold funds for property taxes and insurance, are also protected during a servicing transfer. The new servicer assumes responsibility for making these payments on time from the existing escrow balance.

Impact on Loan Terms and Conditions

The original terms and conditions of your mortgage agreement generally remain unchanged when your lender goes bankrupt and your loan is transferred. Your interest rate, outstanding loan balance, and amortization schedule are typically preserved. The contractual obligations you agreed to when you first took out the loan remain binding, regardless of who owns or services the loan.

This stability means that the core financial structure of your mortgage, including your monthly payment amount, should not be altered due to the lender’s bankruptcy. The new servicer is required to honor the original agreement. Regarding credit reporting, if your mortgage servicing is transferred, your payment history should continue to be reported to credit bureaus, maintaining the continuity of your credit profile. Protections are in place to prevent negative credit impacts for payments made during the transition period, such as the 60-day grace period for misdirected payments.

Steps for Borrowers

If your mortgage lender goes bankrupt, it is important to continue making your mortgage payments as scheduled. Payments should be made to your current servicer until you receive official notification of a transfer. Keep meticulous records of all communications, including letters from the old and new servicers, and retain proof of all payments made, such as canceled checks or bank statements.

Upon receiving a transfer notice, verify the legitimacy of the new servicer before sending any payments. You can typically confirm the identity of the new servicer by contacting your previous servicer directly using known contact information, or by checking official databases like the Mortgage Electronic Registration System (MERS) if your loan is registered there. It is also advisable to monitor your credit report to ensure that your mortgage payments are being accurately reported by the new servicer and that no discrepancies arise from the transfer. Should any issues or questions arise, contact the new servicer promptly and consider retaining copies of all correspondence.