Mortgage Lender goes Bankrupt. What now?

If your mortgage lender goes bankrupt, it can be unsettling, but your mortgage obligations and options remain largely unchanged. Here’s a clear guide on what happens and what you should do, based on current information and practical steps.

What Happens When Your Mortgage Lender Goes Bankrupt?

1. You Still Need to Pay Your Mortgage
   Your mortgage is a legally binding contract, and the lender’s bankruptcy doesn’t absolve you of your obligation to make payments. Even if your lender fails, your loan remains an asset that will likely be managed or sold.
2. Your Loan Will Likely Be Transferred

• In most cases, the bankrupt lender’s assets, including your mortgage, are sold to another lender or investor in the secondary market. This is common even outside bankruptcy, as 62% of U.S. mortgages are purchased or guaranteed by Fannie Mae or Freddie Mac.
• The new owner must notify you within 30 days of the transfer, providing their name, address, and phone number.
• If the lender is FDIC-insured, the Federal Deposit Insurance Corporation (FDIC) may step in, creating a temporary bridge bank to manage operations, as seen with Silicon Valley Bank in 2023. Borrowers are typically instructed to continue payments to the same address until notified otherwise.

1. Loan Terms Remain the Same
   The transfer of your mortgage does not alter its terms, such as interest rate, monthly payment, or remaining balance. The only changes may relate to servicing, like where you send payments or how escrow accounts are handled.
2. Servicing May Change
   If your mortgage servicer (the entity collecting payments) is different from the lender and also goes bankrupt, a new servicer will take over. You have a 60-day grace period after the transfer to avoid late fees if you accidentally send payments to the old servicer.
3. Foreclosure Risk if You Stop Paying
   Failing to make payments during the transition could lead to foreclosure by the new loan owner. While grace periods are standard for late payments during a transfer, deliberate non-payment risks default.

What Should You Do?

1. Continue Making Payments
   Keep paying your mortgage on time to the same address or account, using the same payment method (e.g., checks made payable to the original lender), until you receive official notification of a change. Keep records of payments, including billing statements and canceled checks, for proof.
2. Monitor Communications
   Stay vigilant for notices from the new lender or servicer via mail, email, or phone. The Federal Trade Commission (FTC) advises checking all correspondence to confirm the new servicer’s identity before redirecting payments. If statements are delayed, contact the current servicer to track them down.
3. Verify the New Servicer
   Once notified of a transfer, confirm the new servicer’s details. Check your loan status on Fannie Mae or Freddie Mac’s websites to identify the current owner. Set up a new online account or autopay with the new servicer, and verify that initial payments are processed correctly.
4. Review Your Loan Agreement
   Check your original mortgage documents for “sale and assignment” terms, which outline responsibilities if the loan is sold. This can clarify what to expect during the transition.
5. Address Disputes Promptly
   If issues arise (e.g., incorrect payment processing), contact the new servicer in writing, keeping copies of all correspondence. Send letters via certified mail with a return receipt or via fax with confirmation for documentation.
6. Seek Professional Advice if Needed
   If you’re concerned about foreclosure or payment disputes, consult a bankruptcy attorney or housing counselor. They can help navigate complex scenarios, especially if you’re behind on payments or facing financial strain.

If You’re Considering Bankruptcy

If you’re struggling to make mortgage payments, bankruptcy may offer relief, but it affects your mortgage differently based on the type:

• Chapter 7 Bankruptcy: Discharges most unsecured debts but doesn’t eliminate the mortgage lien. You must stay current on payments to avoid foreclosure, as Chapter 7 doesn’t allow catching up on arrears.
• Chapter 13 Bankruptcy: Allows you to include mortgage arrears in a 3–5-year repayment plan, helping you catch up and avoid foreclosure. You can even apply for a new mortgage or refinance during Chapter 13 with court approval after 12 months of on-time payments.

Additional Considerations

• FDIC Involvement: If your lender is FDIC-insured, the FDIC will manage the transition, ensuring continuity of loan servicing. Deposits up to $250,000 are protected, but this doesn’t directly affect your mortgage.
• Recent Example: In 2023, AmeriFirst Financial Inc. filed for Chapter 11 bankruptcy, but assured borrowers that closed mortgages and loans in the pipeline would remain unaffected, highlighting that bankruptcy doesn’t necessarily disrupt existing loans.
• Market Context: Posts on X suggest broader financial pressures, with some claiming banks are grappling with losses on low-interest mortgages from 2021 due to rising rates in 2025. While not directly related to lender bankruptcy, this underscores the importance of staying informed about your loan’s status.

Bottom Line

Your mortgage remains enforceable even if your lender goes bankrupt. Continue making payments, monitor for transfer notices, and verify the new servicer’s details to ensure a smooth transition. If you’re facing financial challenges, explore options like loan modifications or bankruptcy with professional guidance. By staying proactive and informed, you can navigate this situation without risking foreclosure or financial disruption.

Sources: Investopedia, Bankrate, Texas Law Help, JVM Lending, HousingWire, and posts on X.