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Mortgage Q&A: “What happens to my mortgage if my bank fails?”
It’s happening again – banks are failing. The latest are Signature Bank and Silicon Valley Bank, respectively the third and second biggest failures on record.
The mortgage-driven failure of Washington Mutual in 2008 still stands as the largest bank failure in US history. But will it be able to retain its crown?
Before This Latest, Unexpected Drama, A Bank Hadn’t Failed for about 900 daysWhich was a good run (no pun intended).
Back in 2009-2010, banks were failing at a fairly steady clip (at least every week, sometimes several). At the time, many homeowners wondered what would happen if their bank failed.
And some may have gotten excited at the thought of their mortgage being extinguished immediately. Eventually, it looks like everyone else got bail. Why not the family members?
Not so fast…it doesn’t work that way. That would be nice though, wouldn’t it?
It starts with a bank run
- If your mortgage bank fails (or is at risk of failing)
- Maybe a bank running on deposits and eventually getting an FDIC takeover
- But don’t expect to pay off your home loan in the process
- or become immediately due in full for the entire loan balance
Some people already know what happens when a bank fails, especially if they had uninsured deposits and went to their local branch for the old-timey bank run.
It’s crisis-mode and largely bad news. And potentially money was lost too, although this time the government stepped in and promised no money lost for depositors.
But what about outstanding debts like the mortgage, can’t that also disappear, like your hard-earned savings? And I mean disappear in a good way… no more home loan worries. Instantly free and clear!
Back in 2009/2010, many home owners were underwater, meaning they owed more than their properties were worth. So the idea of paying off the mortgage was very appealing.
Today, most homeowners have a good amount of equity. But it doesn’t matter much. The answer is still the same.
If the bank holding your mortgage or the mortgage lender fails, not much will change.
The entire loan balance will not be payable immediately. You will not get a free house, nor will you be occupied. Oh, and mortgage rates won’t drop to zero.
All terms and conditions of the loan including the loan tenure will remain unchanged. This will be business as usual, even if your mortgage lender or bank is no longer in business.
Who Really Owns Your Home Loan?
- If Your Bank Fails You Could Be In For A Big Surprise
- Chances are they don’t actually own your home loan
- It may have been transferred to another institution months/years ago
- Focus on your loan servicer, not the originator bank/lender
At this point you should know that you still need to make payments on your mortgage based on the agreed terms.
This means the same outstanding loan balance, mortgage rate, loan term, monthly payment, etc.
Perhaps more interestingly though, you might be surprised to learn that the original bank or lender (the one that took your loan application and funded your loan) no longer holds your mortgage either.
This is correct; It could have been sold years ago to another loan servicer, who has been collecting payments from you ever since.
In this case, absolutely nothing will change because of the bank’s failure. You will continue to make payments to a debt servicer that has nothing to do with the failure.
But if the original bank still held your mortgage at the time of failure, you will receive documents from the new owner.
This will include instructions on how to manage the loan going forward and possibly a grace period.
The end result would be sending your monthly mortgage payment to another company.
In other words, signing up for an account on the new bank/servicer’s website and entering your payment information to ensure that payments are routed properly.
I know, it’s not that exciting; But if your bank fails, be sure to keep a close eye on your mortgage payments and beware of scammers looking to take advantage of any confusion or misinformation.
Make sure the new owner of the mortgage is actually the owner and not a scam artist. Call when needed. Verify paperwork. And keep paying your mortgage.
Read more: mortgage rates vs bank failures
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