What Happens If My Lender Goes Bust?
How does the mortgage meltdown affect existing mortgages?
Elizabeth Carlassare
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What Happens If My Lender Goes Bust?
Today’s topic is how the mortgage meltdown affects existing mortgages.A listener named Don e-mailed me with this question:
The banks have decided to quit lending money to the mortgage company that holds both my mortgages. My question is: how does this affect me (and those of us who have our homes mortgaged by the company)? According to the news, the company in question is one of the nation’s biggest. If they go bust, is it possible that the terms of my mortgages could change? Would the Fed bail out the mortgage company? Am I subject to the whim of whoever buys out the mortgage assets of my current company? Just wondering how worried I should be at this time.
Thanks for the question, Don!
What Happens If Your Lender Goes Bust?
In the U.S., if your mortgage lender were to go bust, the terms of your mortgage would not change. Another company would take over the loan servicing (that is, continue to send you statements and collect mortgage payments), but the terms of existing loans would hold.
Mortgages During the Great Depression
During the time of the Great Depression, the rules were different and lenders could call a mortgage loan due if they wanted to, and they did. Back then, lenders could demand full repayment of a loan at any time.
When the stock market crashed on October 29, 1929, millions of people who had bought stock on margin (that is, with money borrowed from their brokerage) received margin calls. To cover the margin calls, many of these people went to their banks to withdraw cash.
With this run on the banks, it wasn’t long before many banks ran out of cash and resorted to calling mortgage loans due from homeowners in good standing with a history of on-time payments. Because of the stock market crash and high unemployment, demand for homes was low and home prices fell. Homeowners couldn’t easily sell their homes to pay off their entire mortgage balances, and many homeowners lost their homes to foreclosure.
Your Lender May Change, But Your Loan Terms Won’t
In response to the crisis, the rules changed. Today, lenders cannot call a mortgage loan due whenever they want to. As long as the borrower makes timely payments and abides by the terms of their loan, the lender can call the loan due only if the property is sold or transferred.
So relax! Your loan terms won’t change if your lender goes bust.
However, a lender that fails will not be able to fund its new loans that are in process, so loan applicants who have not yet closed on their loans would need to look elsewhere for financing. But the terms of existing loans would be unaffected.
Administrative
Today, we have another book giveaway. I’m giving away a copy of The History of Money and Banking in the United States by Murray Rothbard. And the winner is Jody in Hennepin, Illinois. Jody was automatically entered in the book giveaway when she sent me an email. Congratulations and be sure to check your email for instructions.
Bank image courtesy of Shutterstock