What if the Bank Holding My Mortgage Fails amid the Financial Crisis?

I have a mortgage in good standing and very good credit. I am worried however about the future of the company that owns my mortgage. What happens if the banking company that purchased my mortgage fails due to the current financial crisis? Will another company simply purchase my mortgage from the rubble of the the failed bank?

1 Answer

In short, you will continue making your mortgage payment as you do now. You may end up making the payment to another bank, but the loan itself will remain unchanged.

To fully understand, you have to change views from your view to that of your bank. Your mortgage is a liability to you, it is a bill that you must paid each month for the money that you have borrowed. To your bank, your mortgage is an asset, they receive income each month from your mortgage payments. As such, the asset is valuable to that bank, or any bank that would purchase the loan. There a number of things that could happen if your current bank were to fail.

1.) If the bank truly 'fails', the FDIC would come in and take control of the bank. When this happens, they typically either operate the bank as in, under a similar name (this is what happened to IndyMac) while they wind down operations. If this happened, they would likely, at some point sell your loan to raise funds to cover the deposits that they insured. The second thing that may happen in an FDIC failure is that the FDIC would arrange a purchase of the failed bank from another financial institution. In this case, your account would fall under the new purchasing bank, although typically it takes some time to merge the 2 operations together.

2.) In a case where a bank is having a difficult time, but has not been shut down by the FDIC, they could arrange an arms length sale to another bank. In this case, the loan becomes an asset of the new bank, and at some point, once operations are merged you would make payment to that bank.

There are multiple other options that the bank could face, but ultimately, you will continue to make your loan payment as normal, either to the current bank, or the lender who purchased/merged/took over the failed entity.