To say the current real estate market is a mess would be a slight understatement. We haven’t seen problems like this since the Great Depression. This is particularly true with banks, which are failing or on the cusp of doing so.
Bears Stearns. IndyMac. As the real estate industry pulls back, banks have started failing. The grim news is the problem has really only begun according to most experts. We can expect to see more banks, particularly regional institutions, facing big problems. That doesn’t mean that the big boys are any better off as seen by, for example, the rumors surrounding Washington Mutual and its anemic share price in the $3 to $5 range. Put simply, things are ugly out there.
For many homeowners, a fairly simple question comes to mind when banks have problems. Simply put, what happens to my mortgage if the bank fails? Is it terminated? Do I have to come up with the amount due? Do I get the house free and clear? Frankly, it can get pretty panicky pretty quickly.
The first thing to do if your bank goes under is take a deep breath. In truth, not much is going to happen to you. You will probably receive a letter indicating some other institution is now handling your loan and, of course, a detailed statement on where payments should be sent. Your loan will not come due immediately. Things will more or less remain the same.
Why is this? Well, the first thing to realize is the bank that gave you the loan probably sold it off on the secondary market long ago. Until recently, real estate loans were seen as a great, stable investment. Large investors such as pension plans would flock to buy the securities because they could predict returns into the future based on the interest rates of the loans. While these loans are no longer viewed as good investments, the simple fact is the failure of your originating bank may not effect you at all since the loan may already be processed by another bank or group.
Ah, but what if your loan is with a bank that does fail? Again, there is little reason to panic. The government will move in to take over the bank and it will be sold to another group. Because your loan produces income [your payments], it is viewed as an asset that will be purchased by another financial institution. In short, things will remain the same.
Although the banking industry is going through an iffy time, the actual effect on your current mortgage is negligible. The failure of a bank may cause things to go askew for a month or so, but you can expect that things will generally remain the same. Your loan will not be called and you will be expected to make your usually monthly payment.
Raynor James writes about common issues related to
mortgage loans for FSBOAmerica.org.
