Mortgage Q&A: “What happens to my mortgage if my bank fails?”
It’s happening again – banks are failing. The latest being Signature Bank and Silicon Valley Bank, the third and second largest failures on record, respectively.
Washington Mutual’s mortgage-driven failure in 2008 still stands as the largest bank failure in U.S. history. But will it retain its crown?
Prior to this latest, unexpected drama, a bank hadn’t failed for nearly 900 days, which was a good run (no pun intended).
Back in 2009-2010, banks were failing at a pretty steady clip (at least one every week, sometimes several). At that time, many homeowners pondered what would happen if their bank failed.
And some may have gotten excited at the thought of their mortgage being instantly extinguished. After all, it seems everyone else got bailed out. Why not homeowners?
Not so fast…it doesn’t work that way. It’d be nice though, right?
It Starts with a Bank Run
- If the bank that owns/holds your mortgage fails (or is at risk of failing)
- There might be a bank run on deposits and eventually an FDIC take over
- But don’t expect your home loan to be paid off in the process
- Or for the entire loan balance to immediately become due in full
Some folks already know what happens when a bank fails, especially if they had uninsured deposits and scrambled down to their local branch for an old-timey bank run.
It’s crisis-mode and largely bad news. And potentially lost money too, though this time around the government stepped in and promised no lost money for depositors.
But what about outstanding loans like the mortgage, couldn’t that just disappear too, like your hard-earned savings? And I mean disappear in a good way…no more home loan to worry about. Instantly free and clear!
Back in 2009/2010, many homeowners were underwater, meaning they owed more than their properties were worth. So the thought of getting the mortgage paid off was very enticing.
Today, most homeowners have good amounts of equity. But that doesn’t much matter. The answer is still the same.
If the bank or mortgage lender holding your mortgage fails, not much will change.
The full loan balance won’t become due immediately. You won’t get a free house, nor will you be foreclosed on. Oh, and the mortgage rate won’t drop to zero.
All the terms of the loan, including the loan term, will remain unchanged. It’ll be business as usual, even if your mortgage lender or bank is no longer in business.
Who Actually Owns Your Home Loan?
- If your bank does fail you could be in for a big surprise
- Chances are they don’t actually own your home loan
- It may have been transferred to a different entity months/years ago
- Pay attention to your loan servicer, not the originating bank/lender
At this point you should know that you still need to pay your mortgage back, based on the agreed upon terms.
This means the same outstanding loan balance, mortgage rate, loan term, monthly payment, etc.
Perhaps more interesting though, you may be surprised to find out that the originating bank or lender (the one that took your loan application and funded your loan) doesn’t even hold your mortgage anymore.
That’s right; it could have been sold off to another loan servicer years ago, who has been collecting payments from you ever since.
In this case, absolutely nothing would change due to the bank failure. You’d continue paying the loan servicer that has nothing to do with the failure.
But if the originating bank still held your mortgage at the time of failure, you would receive documentation from the new owner.
It would include instructions on how to manage the loan going forward, and potentially an accompanying grace period.
The end result would be sending your monthly mortgage payment to a different company.
In other words, signing up for an account at the new bank/servicer’s website and inputting your payment info to ensure payments are routed properly.
I know, it’s not that exciting; but if your bank does fail, be sure to keep a very close eye on your mortgage payments and watch out for scammers looking to take advantage of any confusion or misinformation.
Ensure that the new owner of the mortgage is indeed the owner, and not a scam artist. Make phone calls if need be. Verify the paperwork. And keep paying off your mortgage.
Read more: Mortgage rates vs. bank failures