Ensure you keep making your mortgage payments.
Bank failures are rare, but within a span of several days in early March, three banks quickly collapsed: Silicon Valley Bank (SVB), Signature Bank, and Silvergate Capital. The failure of SVB and Signature are the second and third largest bank failures over the past two decades. Unfortunately there is fear that other banks may also follow suit, with First Republic Bank and Credit Suisse requiring emergency funding. With worry that the financial contagion may spread, you may be wondering what would happen to your mortgage if the bank that issued it suddenly fails. It's a scary thought, but it's something that you need to be aware of in case you ever face this situation. Let's take a look.
What happens when a bank fails?
When a bank fails, the Federal Deposit Insurance Corporation (FDIC) steps in and takes control of the bank to prevent further losses. The FDIC is a government-backed agency that insures deposits of up to $250,000.
The FDIC typically responds within a business day by either transferring insured balances to new accounts in another secure bank or directly issuing checks to depositors. The FDIC then sells off all of the assets (such as mortgages) held by the bank to another financial institution that is better suited to handle them.
What happens to your mortgage?
When your mortgage is acquired by another institution, you will continue making payments as usual. However, there may be some changes made to terms or payment structure, depending on the new institution's policies. Even though the mortgage is a liability for you as the borrower, the mortgage is an asset for the lender. When the FDIC sells the mortgage to another financial institution, it assumes the responsibility for the loan. In many cases, any changes are minimal and won't have much of an effect on your current payments or loan amount.
The new loan owner is legally required to inform you within a month from the official transfer date. You'll receive all the essential contact details, know who you'll be dealing with, and learn if the switch is officially recorded. This ensures a seamless transition and peace of mind in managing your loan payments.
Find out who your new servicer is
It is also important to understand the difference between your mortgage lender and mortgage servicer. Your mortgage lender is the financial institution that loaned you the money. Your mortgage servicer is the company that handles the day-to-day tasks, such as sending you your mortgage statements.
It is critical that you don't stop paying your mortgage just because your bank has failed. The new owner of the loan can foreclose upon you if you do. If you are unsure who holds your mortgage, contact the FDIC, the mortgage servicer, or you can call the MERS® Servicer Identification System at (888) 679-6377 or visit its website. MERS is a private company that maintains information about mortgage loans and servicers.
No one likes to think about their bank failing, but it is important that we understand what could happen in this scenario. If your bank does fail, don't panic; just stay informed and updated on any changes or modifications made to your mortgage agreement. This way you know exactly what kind of loan you have with which lender at all times. It is important that you continue making your payments so you don't risk foreclosure from the new lender. With proper knowledge and preparation, even a bank failure won't stop you from attaining financial security!
