The short answer: Yes. If your mortgage lender goes bankrupt, you still need to pay your mortgage obligations. When a mortgage lender goes under, all of its existing mortgages will usually be sold to other lenders. In most cases, the terms of your mortgage agreement will not change. The only difference is that the new company will assume responsibility for receiving payments and for servicing the loan.
Key Takeaways
- If your mortgage lender goes bankrupt, you still need to make your regular mortgage payments.
- As a result of bankruptcy, the mortgage lender's assets, including your mortgage, may be packaged together with other loans and sold to another lender or investor.
- If your mortgage is sold, the new owner, by law, must notify you within 30 days of the effective date of transfer and provide the new owner's name, address, and phone number.
What Happens When Your Mortgage Is Sold?
If the mortgage lender that originated your loan goes bankrupt, your mortgage still has value and will be purchased by another lender or investor in the secondary market. The secondary market is where previously issued mortgage loans are bought and sold.
Although a mortgage is a debt or liability to the borrower, it is an asset for the lender since the lender will receive interest payments from the borrower over the life of the loan. Interest payments made to a bank are similar to an investor earning interest or dividends for holding a bond or stock. A dividend is a cash payment paid to shareholders by the company that issued the stock. Similarly, the interest payments that you pay on your mortgage are akin to you paying the bank a monthly dividend.
As a result of bankruptcy, the mortgage lender's assets, including your mortgage, may be packaged together with other loans and sold to another lender or investor. The new owner of your loan makes money on any fees and interest from the mortgage going forward.
Important
In March 2023 Silicon Valley Bank in Santa Clara, California, failed and was taken over by the Federal Deposit Insurance Corporation (FDIC). The FDIC then created a temporary bridge bank, the Silicon Valley Bridge Bank, to carry on the defunct bank's business. At the time, the FDIC instructed borrowers that, "You should continue to make your payments according to the terms of your written contract. You may continue to send your payments to the same payment address with checks made payable to Silicon Valley Bank. You will receive a letter advising you of any changes." It also assured them that, "All services previously performed related to your loan will continue." The FDIC provided similar instructions to customers of Signature Bank, a New York–based bank that failed the same month.
Other Reasons Your Mortgage Could Be Sold
It's important to note that it's normal business practice for some lenders to sell their mortgages to other companies in situations outside of financial distress.
For example, your loan may already have been sold to Fannie Mae (the Federal National Mortgage Association) or Freddie Mac (the Federal Home Loan Mortgage Corp., or FHLMC), two companies created by the federal government for that purpose. As of 2020, they purchased or guaranteed 62% of all mortgages originating in the United States.
Loan guarantees from Freddie Mac and Fannie Mae help lenders by reducing their risk. The guarantees also help investors who might want to buy the mortgages for the interest income. As a result of the guarantees, lenders can make loans and mortgages more affordable to borrowers and increase the number of loans that are available.
Banks that issue mortgages or any other loans have limits on how much they can lend since they have only so much in the way of deposits on their balance sheets. As a result, selling your mortgage to another company removes your loan from the bank's books and frees up their balance sheet to lend more money. If banks couldn't sell mortgages, they would eventually lend all of their money out and be unable to issue any more new loans or mortgages. The economy would likely struggle in such a scenario, which is why bank loans are allowed to be sold off in the secondary market.
What to Expect If Your Mortgage Is Sold
According to the Consumer Financial Protection Bureau (CFPB), if your mortgage is sold, the new lender must "notify you within 30 days of the effective date of transfer. The notice will disclose the name, address, and telephone number of the new owner."
It's worth taking the time to read the fine print when you take out a mortgage. You can check your original loan agreement and your documentation for a section that defines the responsibilities of each party if the mortgage is sold or assigned to another company, often called the "sale and assignment" terms.
What Happens When a Bank Goes Bankrupt?
If the bank is insured by the Federal Deposit Insurance Corporation (FDIC), as most banks are, the FDIC will cover customers' deposits up to the legal limits and also take over the bank's operations as receiver. That means it "assumes the task of selling/collecting the assets of the failed bank and settling its debts," the FDIC explains.
What Happens to a Mortgage If the FDIC Takes Over the Bank?
The FDIC will either sell your loan right away or keep it temporarily. "In either case your obligation to pay has not changed. Within a few days after the closure, you will be notified by the FDIC, and by the purchaser, as to where to send future payments," according to the FDIC.
What Is the Difference Between a Lender and a Loan Servicer?
A lender is the company, such as a bank, that issues a mortgage or other loan. A loan servicer is the company that services it on an ongoing basis, by collecting monthly payments and maintaining an escrow account to cover real-estate taxes and insurance, for instance. Some lenders do their own servicing, while others farm it out to separate companies. If you have questions about who actually owns your mortgage, the Consumer Financial Protection Bureau suggests calling or writing your servicer; in some cases you can also find the information online.
The Bottom Line
When your mortgage lender goes bankrupt, your loan will typically be sold to another lender or investor (if it hasn't already been). Your obligations, and the new lender's, will remain the same as before.
