What Happens If a Mortgage Company Fails?
Chapter 13 Bankruptcy
- When a mortgage lender goes out of business, there is often confusion among borrowers as to what will happen to their lender and their mortgage. In most cases, the fate of the mortgage lender itself is separate from the mortgage; that is, the lender may cease to exist, but the mortgage will continue regardless of what ultimately happens to the lender. When a mortgage bank goes into bankruptcy, it may file for Chapter 13 bankruptcy, which is a company reorganization intended to strip down the company and make it profitable. Under Chapter 13, the mortgage company has a chance to come back from failure, meaning it may continue to hold onto its mortgages. The company may also be bought out by another company, in which case it would still hold its assets--including mortgages--under the umbrella of the purchasing company.
Chapter 7 Bankruptcy
- Chapter 7 bankruptcy is a complete shutdown of operations without the intent to reorganize and save the company. Chapter 7 is usually the route taken when a company has no other options in terms of buyouts or clear path to profitability. If a mortgage lender goes into Chapter 7, all of its assets will be liquidated, including their mortgage holdings. The mortgage company sells its mortgages to the highest bidders, who will then be entitled to the same mortgage payments the previous mortgage company was before it went out of business. The price paid for mortgages by other companies may be substantially less than the amount owed by individuals if the mortgages are viewed as risky or subprime assets--which is often the case with failed lenders.
Impacts of Mortgage Lender Failure on the Borrower
- For an individual borrower, the effect of his mortgage bank failing will often not have a large impact on the mortgage. Contracts are usually fixed, and persist after the asset has been sold to a different company. In rare cases, a mortgage may be eliminated if there are no buyers. This normally occurs when the value of the home minus property taxes and other costs--such as damage from lack of upkeep--is low or even less then zero. The failure of a mortgage company can potentially give the borrower greater ability to attempt to renegotiate the terms of her mortgage. When lenders hold many bad debts, they may be willing to lower interest rates or principal owed if they believe it will prevent foreclosures and allow them to stay in business.