These days it seems as though mortgage lenders are dropping like flies. So how does it affect you if your home loan company goes belly-up? It depends on whether you have a preapproved loan and are still house-shopping or are already making payments. Your response to the news is also driven by the reason for the company’s exit from the business–if for example there is fraud involved, if the company is being sold, or if bankruptcy is in the works.
First, if you are still shopping for your home and you hear your lender is in trouble, you need to make a few phone calls. If you are working with a mortgage broker, find out what he or she knows about the situation, if your mortgage pre-approval is still valid, and if the loan product you are planning on using is still available. Keep in mind that programs are subject to change without notice and that payment option, stated income, interest-only, 100% financing, or other products may not be available even if you have been pre-approved for such a loan. Your broker should be springing into action and arranging alternative financing in the event that your lender can’t close the deal when you’re ready. If you are working with a bank and have a property in escrow, check with your loan officer to make sure that you are still on track to close on time. If you can’t get this guaranty, preferably in writing, it’s time to find another lender before an unpleasant surprise derails your home purchase.
If you already have a mortgage with a lender who is in trouble, what do you do? First, continue making payments. Federal law states that mortgage terms cannot be changed regardless of who is servicing the loan (collecting your payments). However, you want to be sure that your payments are being credited to your account properly–when someone else takes over your loan the transition isn’t always as smooth you’d like. Check with your current servicer about future changes and continue to make your payments to the same address until you get TWO notices (sometimes called transfer letters). One will be from your old lender and one will be from the new servicer. Watch out for scammers! Some may deliver notices telling borrowers to make their checks out to a new lender and send them to a new address–and you might find yourself funding some dirtbag’s permanent exit to Bermuda. You will also want to verify that your taxes and insurance are being paid by your lender if these amounts are included in your mortgage payment (impounded).
Finally, if your lender was shut down by regulators be extra-diligent. If there are fraud charges, find out what the lender is accused of doing. Some fraud cases involve identity theft–get a copy of your credit report asap if this is the case and put a fraud hold on your credit report. You may even want to register with a service to keep an eye on your credit information for a while. Other kinds of fraud involve misappropriation of funds such as impounded tax and insurance payments. Call your county and insurer and make sure these payments are current. Some fraud could even involve you! For example, you may have applied for a loan on an investment property, but, lo and behold, the final documents show a loan against a primary residence. Or the income listed on your application doesn’t reflect what you told your loan officer. Or the property value is overstated. It is important to read everything before you sign, but if you spot something after closing on your loan, inform the authorities in your area.
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So if your lender is shut down due to fraud, do you as the homeowner have to find a new lender to take over the home loan? Or how does that work and how do you know if the next lender isn’t going to do the same thing?
This just happened in Reno as a matter of fact. The State of Nevada shut down a lender called Cetus Mortgage. In this case the lender defrauded its investors, not its borrowers. What normally happens in these cases is the government steps in, takes over the institution, and oversees the sale of the portfolio of loans to other lenders. So, keep making your payments and look for notices that tell you when your loan has been transferred to the new company.
Great thanks, it’s good to know that the Gov steps in so hopefully people don’t get defrauded themselves.
Good post!
What if you continue to send your payment in to your old lender, to the old address? If it has to be forwarded, it may be late. Will you be charged late fees in this type of circumstance?
You shouldn’t be. Your old lender should have notified you of the change at least 15 days prior to your due date, and federal law prohibits lenders from considering your payments delinquent for 60 days after the loan has been sold. This allows you ample time to verify with your old lender that you have a new servicer.
Funny, after this came out Indymac bank was shut down by regulators. This is the second largest bank failure in US history, and officials have hastened to assure customers that they will be taken care of. Stay tuned….