Recently a number of banks have been filing for bankruptcy or have been taken over by other banks. Many people are concerned about what that might mean for the mortgage that bank holds, and are confused what happens next. There are a few common points involved in understanding how this works.
- How Bankruptcy Works
- Debt As An Asset
- Can A Bank Buy A Mortgage And Change the Terms?
- The Truth in Lending Act
How bankruptcy works.
Bankruptcy essentially means that a company or individual can no longer afford to pay their debts. That doesn’t necessarily mean that all their debts are forgiven or disappear. (In the case of banks, their assets are either auctioned off, or in some cases, outright assigned to other banks by the government.)
Debt As an Asset
When you have a mortgage with a bank, it is a debt for you. (For the bank, though, it’s an asset; it’s something that brings in money.) Even when mortgage holders can’t pay their bills, and the bank in turn is unable to pay their own bills, every mortgage the bank holds still has some kind of value. If nothing else, there is the possibility of the bank foreclosing on the collateral property in order to sell it. When a bank declares bankruptcy, its assets – including the mortgages it hold – are either auctioned off or assigned to other banks to help pay for its debts.
Can a Bank Buy A Mortgage And Change the Terms?
The answer to this is often in the mortgage contract, which is a really good reason to make sure you read your mortgage contract and consult your attorney before signing one. In most cases, as long as you are paid up and following the terms laid out in your mortgage, a company cannot change it. However, if you become delinquent, there are often provisions that allow the new owner to change the terms, as could the original bank if you were to default. Some people assume that if their lender is overloaded with debt and declares bankruptcy, their mortgage disappears. This is rarely true, and assuming so without proof in writing could make for a very big financial pitfall.
The Truth in Lending Act
Recently, some of the troubled lenders have been investigated for telling borrowers incorrect terms about their mortgage. (Many mortgage holders who thought they had a traditional 30-year mortgage in fact had an adjustable rate mortgage, or one with a balloon payment. ) Every mortgage contract must conform to the Truth in Lending Act, which among other things requires lenders must plainly state the actual interest rate in the contract.
The old adage holds true: you should always read your contract, especially in an environment where mortgage companies are being investigated for lying to consumers about the mortgage terms. Even if your lender is not one of the many currently facing bankruptcy, you should know what terms might change if your mortgage were to be sold or if you were to default. For most people with mortgage debt, as long as you are still in good standing with your current lender, it would be unlikely for the terms of your mortgage to change. For owners not in good standing, it would be very good to contact the new company that holds your mortgage very quickly. Often times, mortgages in default can be sold very cheaply to companies that are interested in taking ownership of the collateral property, not a repayment of the loan, which they may have purchased for pennies on the dollar.