When mortgage lenders go out of business and are essentially taken over by the FDIC, homeowners are left wondering if they still need to make a monthly payment.
Great thought, and a very common question for many borrowers in the 2006-2010 timeframe.
The short answer is YES, you still have to continue making mortgage payments if your current lender files for bankruptcy or disappears over the weekend.
In order to give a more thorough answer to this popular topic, we’ll need to address the relationship between mortgage loans as liens and mortgage servicers who make money by handling payments.
To put this topic in perspective, 381 banks actually filed bankruptcy between 2006 and 2010 forcing them to cease their mortgage lending activities. And a common misconception borrowers have about their mortgage company is that their agreement should become obsolete once the lender files for bankruptcy or goes out of business.
Based on the way mortgage money is made, packaged and sold on the secondary market as a mortgage backed security, the promissory note (agreement) is actually spread between many investors who rely on a servicing company to collect and manage the monthly payments.
A mortgage is considered a secured asset, where the collateral is real estate. And, the mortgage note has a separate value to investors and servicers based on the interest and servicing fees they have wrapped up in the monthly payments.
This is why many mortgage notes get sold to other servicers who pay for the rights to service your loan. So basically, even if a mortgage company is bankrupt, someone else is willing to take on the job of collecting payments.
Also, by signing a mortgage note, the borrower is committing to continue making the required payments, regardless of what happens to the mortgage company servicing your loan.
- Your house is an asset
- The mortgage note has a separate value to investors
- Regardless what happens to your mortgage company, you need to make your payments
Also, it’s important to continue making your mortgage payments on time, regardless of which servicing company is sending a monthly statement. Obviously, keep a good paper trail of those mortgage payments in case there is a mix-up between transitions.