As seen in the New York Daily News.
Those risky mortgages of recent years dragged down plenty of homeowners, but now they’re taking out many of the huge lenders that underwrote them.
Big names like HSBC, Countrywide and even Citigroup have grappled with growing defaults. Worse, Long Island-based American Home Mortgage filed for bankruptcy protection, Fremont Capital sold its mortgage business to a hedge fund and Ameriquest closed more than 200 branch offices.
Such dire news can leave borrowers who are keeping up with their bills in limbo. Your Money spoke with American Bankers Association spokesman John Hall, Mortgage Bankers Association spokesman John Mechem and Jacqueline McCormack, communications director at the state Banking Department, to figure out what someone with a mortgage or loan should do when their lender is in trouble.
Here’s what they said:
UNDERSTAND WHAT’S HAPPENING
There are two common situations when a lender goes under — one change that the borrower won’t notice and another that he or she will, Mechem said.
“It may be a situation where they’re no longer making new loans but they continue to service existing loans,” Mechem said. “In that circumstance, the borrower should see no changes. They’ll continue to get their statement as usual.”
But if the company goes bankrupt and sells its assets, you may be writing your monthly check to someone else.
“The loan is obviously an asset. The customer will get what we call in the business a ‘Hello-Goodbye Letter,’ saying that the company has sold your loan and here is the new institution’s contact information.”
The new bank takes over servicing of the loan, and they can enforce the loan contract with you. Keep the payments going out on time.
LEARN THE PROCESS
Understand that most of the changes are going on behind the scenes and know that the Federal Deposit Insurance Corporation is charged with handling this event, Hall said.
“Generally, for a bank, if it should go under, the FDIC will try to have the bank and its assets merged or purchased by another institution.”
There’s plenty of incentive on both sides of the deal, too: Other lenders want your business, and the government doesn’t want to get more involved than it has to. “The FDIC does not like to take over banks,” Hall said. “They’re not in the business of running financial institutions.”
REVIEW THE TERMS
The terms of your loan stay the same while the merger or acquisition occurs, McCormack said. Review the details of your original mortgage or loan agreement. If your lender does shutter the servicing portion of the company, you should receive a letter from a new company at least 30 days in advance.
“It’s a transfer of servicing rights. There’s a federal regulation that requires the new servicing company to notify you of the change 30 days in advance, but most of them will give notice 45 days ahead,” McCormack said.
Officially, 15 days is required for notification, so if you only get a letter 15 days ahead of time you’ll get 15 days after the switch as a grace period. “However, there’s no official grace period, so consumers should continue paying on schedule,” McCormack added.
CHECK YOUR STATUS
Consumers that are more likely to be affected are those who have been approved but have not yet closed on a mortgage, McCormack said.
“If you’ve been approved and your approved loan is going to end up in transfer to another servicer, there’s a risk that the terms could change,” she said. “However, it’s more likely that the companies will work to keep them the same.” Call to make sure you know exactly where you stand.
KNOW THE ODDS
“So few banks have failed,” Hall said. “I’ve been in ABA long enough where I remember the savings and loan crisis of the late ’80s. Savings and loans were failing and banks were failing all over the country. There’s really no chance of that happening today. Banks have much more capital and reserves than they did at that time.”
Recent figures supported Hall’s claim: In a March 21 speech by FDIC Chairwoman Sheila Blair, 50 institutions were mentioned as being on the organization’s problem list — one of the lowest numbers in FDIC history.