What Happens If a Mortgage Company Collapses?
Hearing the company that holds your mortgage has collapsed may trigger both fear and hope. If you are expecting that it means you won’t need to pay your mortgage, then you are out of luck. You’re still on the hook for the money. But if you are scared it means you’ll need to pay off your entire mortgage immediately, unwind. All the terms remain in effect.
In the mid 2000s, housing prices had risen to economically unsustainable levels, driven there by reduced rates of interest, loose lending procedures and rampant investor speculation. This”real-estate bubble” started to fall in 2006, as borrowers defaulted on loans they couldn’t pay–and left their mortgage companies in possession of homes that were worth much less than the borrowers had paid for them. In the ensuing years, tens of thousands of mortgage companies fell under the weight of outstanding loans and foreclosed homes that they could not market. According to research by the Mortgage Lender Implode-O-Meter, a site that tracks such failures, almost 400 big creditors had dropped by late 2010. Some went out of business entirely, others were bought by other financial companies, and others received government help.
Your mortgage loan is a binding contract between you and the lending company. In that arrangement, you agree to make normal payments for the duration of the loan–generally 15 or 30 years–or until you sell the house and pay the loan in full. That guarantee makes your mortgage an asset on the books of your own mortgage company. In fact, if you are a responsible homeowner that faithfully makes your payments, it’s among the most invaluable assets that company has, says MSNBC.
When a mortgage company collapses, what happens to its assets depends on how its status is resolved. If it gets government help or gets a reorganization under bankruptcy court protection, it keeps its own assets. If another company buys it, then the assets pass to the buyer. If it goes out of business, then its assets are sold at auction to the highest bidder, with the proceeds distributed to its creditors.
Just about any mortgage includes a provision that permits the lender to sell or transfer the loan to another company without altering the real terms of the mortgage. This actually happens all of the time. Lenders that arise mortgages–that is, advance cash to borrowers–routinely sell those mortgages to investors, including the giant government-backed companies Fannie Mae and Freddie Mac.
Irrespective of who pops with your mortgage, you are still bound by its terms–but so is whoever winds up with the mortgage. You still have the same schedule of payments, the same interest rate, everything. In most cases, the only difference you’ll see is in the name (and address) of the firm to which you’ll send your payments.