The topic of bank failures is one that’s in the news in a big way, right with Silicon Valley Bank collapsing a few weeks ago, followed by Signature Bank. The banking collapses triggered selloffs in the stock market and drops in mortgage rates. Any time there’s a bank failure, it shakes consumer confidence and leads to ripple effects throughout the broader economy. While that appears to be settling a bit, it also often leaves consumers wondering how bank failures affect them on an individual basis.
For example, if you have a mortgage and the bank collapses, can you just not pay your mortgage? It was a question being floated, and the answer is that you still have to pay your home loan, but the situation can be more complicated for you if your lender goes bankrupt.
What If Your Lender Goes Bankrupt Once You Close on a Loan?
Once your mortgage is closed on, if the lender goes bankrupt or collapses, it doesn’t impact your loan or shouldn’t. This includes if it’s the company that originated the loan going under or a third party that bought it later.
Borrowers usually don’t even find out about the financial problems of a lender unless it’s a high-profile situation like Silicon Valley Bank. If the situation jeopardizes the charter for the bank, the insurer or the regulatory agency takes over, and that will typically mean the FDIC will make another lender take the loans of the failing bank.
If another bank or lender takes over your mortgage, the loan servicing becomes the responsibility of that new lender, which is the owner of the loan. A servicer or institutional investor that services a loan isn’t likely to go bankrupt, but if they do face any type of financial turbulence, they just sell your loan or the right to service it to someone else.
If there’s a change in your loan servicer, you’ll get a notification of the change from the previous company and the new servicer. Those notices should include details on where to send payments.
Your balance stays the same, as does the amortization. Your responsibilities don’t change because of a change in your servicer, so it’s up to you to make sure you’re paying on time, keeping your property insured, and keeping up on taxes.
What If You Haven’t Closed on a Mortgage Yet?
If you’re in a situation where you’re preparing to close on a mortgage but haven’t yet, and your lender is facing financial trouble, you might have concerns.
However, if you’ve transferred any money to an escrow agent, that should still be secure, no matter the situation the prospective lender is in. You may, however, have to find a new lender for your mortgage.
Lenders will typically stop underwriting loans if they’re near being insolvent. If your financing has already been approved, it shouldn’t be too hard to get a new lender because underwriting standards and guidelines are standardized. Most loans now are usually underwritten by FHA, Fannie Mae, or Freddie Mac guidelines, so you can just shift an appraisal over to another lender but get the same type of loan.
The takeaway is that it doesn’t matter if your mortgage lender collapses as far as paying your loan. You still have to pay your mortgage, and the loan will just be sold to another company. If you stop paying because the lender is having financial problems, you’re putting yourself at risk of foreclosure.
When mortgage lenders file for bankruptcy or fail, nothing should change for you on a personal level, but you might need to make sure you’re clear on who your new lender is and where payments should go.