When Your Mortgage Lender is in Bankruptcy: Now What?

Mortgage lender bankruptcy has become an increasingly common occurrence in the wake of the collapse of the real estate bubble. If you are still paying off your mortgage, you may find yourself wondering what a bankruptcy means for your mortgage. The good news is that if your lender goes bankrupt, the terms of your mortgage will not change. The bad news is that it will result in other, smaller changes that you will need to be aware of as you continue repaying your mortgage.

Mortgage Lender Bankruptcy and Your Mortgage

When a mortgage lender goes bankrupt, it is required to sell it's assets. Those assets include any open mortgages, or mortgages that have not been fully repaid. During the bankruptcy sale, your mortgage is split into two parts, the actual mortgage and the servicing rights. The actual mortgage represents the payments you still owe. The servicing rights represent the rights to manage your mortgage. The mortgages are put in bundles. Those bundles are then used to finance bonds and other investment vehicles. Those investment vehicles, in turn, are sold to investors. The servicing rights are purchased by banks and other mortgage lenders.

When the mortgage lender goes bankrupt, you will still need to make your mortgage payments. However, those payments will need to be sent to whichever corporate entity bought the servicing rights. That bank or lender takes your payment, keeps the small percentage of it as a service fee and sends the rest to whichever bundle your mortgage is in. It will then be split between all the investors that purchased the bonds.

What This Means For Your Mortgage Payments

The terms of your mortgage will always remain the same. The lender that got your servicing rights does not have the right to change any part of your mortgage contract without your explicit consent. So, if you have a fixed interest rate on your mortgage, your interest rate will remain the same, regardless of who owns the servicing rights. If your mortgage lender goes bankrupt, your first step should be to find out who bought your mortgage's servicing rights. 

The the mortgage lender has no obligation to inform you that it has filed bankruptcy. Scam artists have been known to take advantage of the situation. They contact you claiming to be represent the lending institution that got your servicing rights and ask you to send your mortgage payments to them. Fortunately, the federal government has taken measures to help. When the lender sells off your mortgage's servicing rights, it is legally required to send you a document that contains the name of the new owner of the servicing rights. The statement will show a toll-free number and the date on which it assumes responsibility for servicing your loan.

Once the new owner assumes responsibility for servicing you loan, you will need to send your mortgage payments to it's address. If you fail to do so, it has a right to charge you late fees and other penalties specified under your mortgage contract. Keep in mind that the new lending institution may go bankrupt before you finish paying off your mortgage.