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In the first seven months of 2023, four U.S. banks failed. In each case, federal insurance protected customers' deposits up to certain dollar amounts, with the U.S. Treasury and Federal Reserve stepping in to cover the rest. But what happened to the mortgage loans held by these banks?
When a mortgage lender fails, another lender typically takes over your loan. But this doesn't mean you can stop making payments. During the transition process, pay close attention to any communications you receive from your existing lender and your new lender.
Fortunately, bank failures tend to be rare, although they do surge during economic disruptions such as the Great Recession. An average of 3.6 banks failed per year between 2015 and 2022, according to the Pew Research Center. A bank may go under due to factors such as poor business decisions, weak management or tough economic conditions.
Do You Have to Pay Your Mortgage if Your Bank Fails?
Yes, you do need to keep making mortgage payments even if the lender that originated your loan has failed. In other words, your loan doesn't vanish.
Once the Federal Deposit Insurance Corp. (FDIC) closes a bank, it notifies borrowers in writing about temporary payment arrangements. If the FDIC ends up selling your mortgage to another lender, either the FDIC or the new owner of your loan will inform you of the transaction and provide payment instructions.
The FDIC says the loan's new owner:
- Must comply with all state and federal laws regarding ownership and servicing of your loan
- Is allowed to collect all principal, interest, and other money that's owed
The transfer of mortgages from one lender to another normally goes smoothly.
In the biggest bank failure in U.S. history, JPMorgan Chase Bank scooped up the bulk of the assets and liabilities of Washington Mutual Bank in 2008, during the Great Recession, for $1.9 billion. WaMu, as it was known, collapsed due to its questionable mortgage-underwriting standards and other factors.
Chase, as JPMorgan Chase Bank is now known, bought all of the mortgages owned by WaMu. At the time, the FDIC told WaMu mortgage holders that their payment amounts and due dates would stay the same, as would autopay arrangements. Borrowers were instructed to keep making out their mortgage payments to Washington Mutual Bank and sending them to the same mailing address they already were using.
It's worth noting that your mortgage lender and mortgage servicer may not be one and the same. While you borrow money from a mortgage lender to buy a house, you make monthly loan payments to a loan servicer. Your mortgage lender and mortgage servicer might be the same company, but they also might be different companies.
Keep in mind that if your mortgage is turned over to a different loan servicer, you're given a 60-day grace period. While you're still expected to submit payments during this time, you can't be hit with a late fee within the 60-day window if you mistakenly send your mortgage payment to the previous servicer, and the new servicer can't report your payment as being late.
What Happens to Your Mortgage?
When your mortgage lender goes out of business, little changes when it comes to your loan.
The terms and conditions of the loan, such as the interest rate and payoff period, should remain the same after the loan is transferred to another financial institution. And at least at the outset, automatic payments for your mortgage should continue as normal.
In addition, your entire loan balance won't be due right away, and you won't suddenly face foreclosure—unless, of course, you've fallen seriously behind on your mortgage payments.
If your loan is sold to another lender, you're supposed to receive what's known as a loan ownership transfer notice, according to the Consumer Financial Protection Bureau. This notice must be sent within 30 days of the date that the transfer takes effect and must include:
- The name, address and telephone number of the loan's new owner
- The date of the transfer
- The availability of public records about the transfer
How to Stay Current on Your Mortgage Payments
If your mortgage is being transferred from one mortgage lender to another after a bank failure, follow these tips to stay current on your mortgage payments:
- Keep making payments as instructed by the FDIC or the new owner.
- Pay attention to all correspondence you receive about the status of your mortgage.
- Reach out to the FDIC or the new loan servicer if you have questions or concerns about your mortgage or how to pay it.
- Be sure you know whether the company that services your loan is changing. If there is a new loan servicer, you may need to change how and when you make mortgage payments.
The Bottom Line
It can be scary if your mortgage lender goes out of business. Fortunately, federal and state laws are on your side when a bank failure happens. If your mortgage lender collapses, remember that you're still responsible for making timely loan payments. Although your bank may have disappeared, your loan hasn't. Throughout the process, continue to make payments on time in order to protect your credit score.