Yes, if your mortgage lender goes bankrupt, you do still need to pay your mortgage obligation. Sorry to disappoint, but there is no free lunch in this situation. If your mortgage lender goes under, the company will normally sell all existing mortgages 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. However, please be sure to check your mortgage agreement for "sale and assignment" terms.
What Happens When Your Mortgage in Sold?
If the mortgage lender that originated your loan goes bankrupt, your mortgage has value and is 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 for the borrower is a debt or liability, a mortgage to the lender is an asset since the bank collects 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 monthly dividend payments.
As a result of bankruptcy, the mortgage lender's assets, including your mortgage, are packaged together with other loans and sold to another lender or service company, which collects your payments and services the loan. The new owner of your loan makes money on any fees and interest from the mortgage.
Your loan can also be sold to Fannie Mae or the Federal National Mortgage Association (Fannie Mae, or FNMA). Together, as of 2020 data figures, Fannie Mae and the Federal Home Loan Mortgage Corp (Freddie Mac, or FHLMC) purchase or guarantee 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 or loans that are available to consumers.
- If your mortgage lender goes bankrupt, you do still need to pay your mortgage obligation.
- As a result of bankruptcy, the mortgage lender's assets, including your mortgage, are packaged together with other loans and sold to another lender or service company.
- If your mortgage is sold, the new owner, by law, must notify you within 30 days of the effective date of transfer disclosing their name, address, and phone number.
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. Investors want to buy mortgages because it provides them with fixed interest payments.
Also, banks that issue mortgages or any loans have limits on how much they can lend since banks have only so much in deposits on their balance sheets. As a result, selling your mortgage to another service provider 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 would be unable to issue any more new loans or mortgages. The economy would likely struggle in such a scenario, which is why it's allowed for bank loans to be sold off in the secondary market.
If Your Mortgage is Sold
According to the Consumer Financial Protection Bureau or 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."
Please note that it's important 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.