Over the past several weeks, I’ve received a number of comments and e-mails from readers wondering what would happen to their mortgage if their banks fails. Is the loan terminated? Do they have to pay it back immediately? Or do they get to walk away free and clear? In short, the answer to all three questions is an emphatic “no.”
From the bank’s perspective, your mortgage is an income-producing asset, and it can be sold to another institution at any time. In fact, this is quite commonplace. For example, all of our mortgages (four total, including two related to refinancing) have been sold off by the originating institution within a few months. The good news is that the terms of the mortgage do not change when this happens.
Returning to the issue of bank failures, if the bank that holds your mortgage were to fail, the FDIC would step in and oversee the sale of their assets to another institution. Your mortgage would thus be transferred to a different lender, but the terms would remain the same. Shortly after the transfer, the new lender should contact with you instructions as to how and where to make your payments. Mortgage transfers are accompanied by a 60 day grace period during which you cannot be charged a late fee.
As an aside, the current financial turmoil seems like a great opportunity for scammers. Given all the news about banks on the edge of failure, I’m sure it wouldn’t take much to convince unsuspecting homeowners to send their mortgage payment elsewhere. So… If you receive a letter directing you to change where you’re sending your payments, be sure to double-check before acting on it.