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When a company goes bankrupt, its assets become the property of the Bankruptcy Trustee. In the course of the proceedings, the Trustee collects all of the assets of the debtor (bankrupt mortgage company) and sells them. These assets include things like buildings, office equipment, etc. and, most importantly, the mortgages it owns outright or owns the servicing rights to. Upon sale, the proceeds (if any) go to pay the bankrupt company’s debts. These sales are done under the supervision of the Bankruptcy Court.
The bottom line is that if a lender “goes out of business” it doesn’t mean that your debt evaporates. Nor does it mean that your lender will immediately vanish from the face of the earth The mortgage loans will get sold to another lender or servicer and, for the most part, it will be business as usual. You should get a transfer of servicing notice informing you of the name of the new company servicing your loan and contact information, including an address to which you will need to send your payments.
This will make the most sense if you think of the mortgage lender, or bank just like any other company, and consider what might happen in the case of the company filing bankruptcy. For our purpose, and to simplify the answer, let’s leave the FDIC out of it, and assume that this was a mortgage lender and not a federally chartered bank. If it was a bank, than the FDIC typically steps up to protect depositors, and the answer becomes much more complicated.
In short, nothing will happen to a mortgage loan. At some point the loan will be sold to another lender, and the only thing that changes is where the payment is made. There would be no change to the terms of the loan, the interest rate, the payment schedule etc. Only a change in who holds the note, and therefore who would collect the payments.
As for what happens: To a lender, a mortgage loan is an asset. To a borrower a mortgage loan is a liability. Because. to the lender it is an asset, it has value to the lender, and potentially to other lenders. This means that, in order to pay off creditors of the bankrupt lender, loans are sold to other lenders to raise money. Once the loan is sold, servicing transfers. This means that the payment would now be made to the new lender that purchased the loan. In theory this is no different than if a lender decided to sell the loan for any other reason. The process, to the borrower would be the same either way. Once all the assets (loans) are sold through the bankruptcy, and all available money is paid to the lenders creditors, the operation would typically wind down. This activity however, would have no bearing on the borrower, as they would no longer have any affiliation with the original, now bankrupt lender.
If your mortgage company is spending a lot of time on the front pages, you’ll probably want to call its servicing department or check its Web site. How does it affect you if your lender is in trouble? According to federal law, it means that your loan terms don’t change and it doesn’t matter who services your loan (collects your payments). You keep paying your mortgage every month as usual.
If another lender takes over, make sure that your payments are credited to your account correctly—when a new company acquires your home loan, the transition doesn’t always go smoothly and mistakes can happen. Also, verify that your taxes and insurance are being paid on time by your new lender if these amounts are included in your mortgage payment (impounded).
Even if your bank is sold or dies, keep sending your payments to the same address until you get TWO notices (also called transfer letters). The first will be from your current lender/servicer and the second will be from the bank taking over your loan. BEWARE OF SCAMS. The widely-publicized failures and buyouts have caused some lowlifes to take advantage of unsuspecting homeowners. Scammers may send notices telling you to make your check out to a new lender and send it to a different address—and you might find yourself financing some creep’s retirement in the Caymans .
What happens to a home mortgage is a lender goes bankrupt?