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if your mortgage holder goes under

16 years ago

What happens if the company who has your mortgage goes under?

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Comments (20)

triciae
16 years ago
From a borrower's standpoint...nothing happens. If a lender files Chapter 11, they will seek debtor-in-possession financing & it will be business as usual as far as borrowers are concerned. Eventually, if the lender is unable to work out of Chapter 11 then assets will be sold & you will receive notice to make your payments to somebody else.

If you have something like a construction loan that you're relying on...that "could" be a different story.

/Tricia
galore2112
16 years ago
Tricia,

I am wondering, is what you described regulated by law or is this up to the contract between lender and borrower?
Are there situations where the loan becomes due in full, if the lender goes under?
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I have watched the TSP quarterly. I'm not totally sure of the % of the total goes to which fund, but I believe we are fairly diversified and have some funds in 4 or 5 of the different funds (not sure that's the right word). Our pay goes into each according to the % that we alloted the last time we did it. =0) You're doing yourself a disservice to your future retirement if you don't know in what funds your money is allocated, how the bi-weekly pay is allocated and especially how much growth you've had. I only say this because you have recently put your retirement planning to the forefront of your brain and that should include monitoring and learning about the TSP since it will be the vast majority of your husband's retirement. BTW is he under CRS or FERS? Since I started watching the TSP several months ago, I learned that this is not the best time to be in the "F" fund because the USD is constantly down. The domestic US economy is 39th in the world with many of the countries in the "I" fund way higher and close to the top. I originally had everything 20% into each fund, but have since moved things over to the more profitable funds since I"ve learned alot about how the TSP works. 1. Is there a max on the TSP? Hubby says it "used to be 10%", but he thinks that changed. Max amount for 2007 is $15,500 or 20,500 if you're over 50. The max contribution does not include the matching, so that is over and above the limit. We allocate a specific number, not a percentage. We put $425 per pay period into the TSP and that is nowhere near the max, but is over 20% of dh's pay. The more you put in, the more matching you get. If your husband has received any pay increases, then it might be a wise option to increase the TSP contributions. That's what we do whenever dh gets a raise. It allows for a greater tax benefit and more matching dollars. No, I don't mind differing opinions, it helps my brain entertain new ideas and learn something. =0) I know that I am focused on the rental properties and mortgages on them, because at the moment, those are closer to paying off, than the IRA or TSP. I believe in diversification, so the rental properties are currently part of my "retirement plan". They are a part that will begin to pay off long before we retire, and continue once we do retire (or at least that's the plan). I am learning the IRA and TSP world and language (and remember we're looking at 27 years before taking anything out of them, and we are already putting funds into both), but I already understand the houses. =0) It's good that you're looking to diversification and that you're open to look at all avenues. I think what you're missing is the tax benefit to the TSP, especially if you can afford higher deductions because it reduces your taxes that could be offset by the additional tax you pay with your rental properties and paying them off early. Having said that, I prefer to have a home paid for, which goes against many other people's belief here that the funds should go to investment vehicles. I try to diversify that as well by having money in a high yield account plus pay a bit more to principal. Sorry, I thought you were closer to retirement than 27 years to take out of the TSP. That gives you a long time to make the most of your investment opportunity there and is even more reason to learn everything you can about it. If your funds are diversified btwn the 4 or 5, that means you're losing a strong growth opportunity because you would have some money allocated to the G and/or F fund, which aren't producing very well these days. I was extremely overwhelmed when I first started paying attention to the TSP. It's definitely a long learning curve, but I am learning. It is imperitive that you know in what funds you are invested, how much is going into each fund and how they are doing - an not just quarterly. At minimum, you would be best served by checking weekly.
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Hi Tom, (JUST jabbing ya! Everyone calls me Dan, Don... whatever... ;~) I read from the very top of this thread when I stumbled upon it via a Google search on 'Prepay vs Refi'. Google is sweet, no? Very emotionally charged this thread; must have spent a good 2-3 hours trying to understand the postings. I was totally against your argument (angry even) in the beginning but eventually came around to understanding what you are trying to explainthe basic economic concept of maximizing your utility. I *LOVE* seeing that kind of epiphany happening!!! We are currently in the 7th year of a 30-year fixed mortgage at 5.75%. Side Note; REALIZE that the year # is meaningless except for how it affects the weight of your amortization burdens. The further you go, the heavier the weight on your payments against your liquidity. You can *ALWAYS* stroke a check, at any moment, to eliminate as much of your leverage as you can afford. 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Your 401(k)* and traditional IRA (especially after the market collapses) can be rolled on a tax-efficient basis into a ROTH IRA (or similar) and then engaged in fixed-indexed instruments (income or growth annuities) that catch any annual upsides to the stock markets, lock in the gains against any future losses, and guarantee your principal against any stock market downsides. That VUL can be tax-free 1035 exchanged to a fixed-indexed universal contract that will provide the same (or better) upsides, with guarantees against any losses to the downsides. NOW is DEFINITELY the time to stop the losses and get in a position to take advantage of volatility (riding the up-waves, and then locking int the gains with guarantees against downside losses on the down-waves.) With this skepticism in mind and the fact that I hate my mortgage company for what they did to us post-Hurricane Ike, we are thinking that the additional $400 monthly towards the mortgage might be a better way to go for now. 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triciae
16 years ago
jrldh,

No, it's not a contract between the LENDER & BORROWER.

The bankruptcy judge is THE MAN IN CHARGE! Seriously, they have a lot of power/control over the company's fate in a Chapter 11.

Are there situations when a loan could be called if the lender files Chapter 11? The short answer is yes. But, the odds of it happening to a small borrower is not high. So, possible but not likely. Now, as for unfunded obligations...the liklihood of those being 'altered' is higher. Something like a line of credit or a construction loan, for example. A BK judge 'may' allow those to go unfunded.

Bankruptcy laws are Federal (granted to Congress by the US Constitution), however, States retain some control over creditor/debtor issues that are not specifically covered in the Federal statutory laws.

We should also all be keeping a close eye on our Money Market accounts. It's possible for a bank to refuse to allow you to take out your funds when you may want them...read the very, very tiny print. This is different that the 3-6 monthly withdrawals most banks allow. Banks invest your money market dollars in commercial paper (i.e. Countrywide Financial?). We've NOT HAD ANY DEFAULTS ON MONEY MARKET FUNDS SO DON'T PANIC...but do pay attention. There was a bank money market fund back in 1994/1995 that went belly up.

Tricia
triciae
16 years ago
I should note that with your Money Market funds...they ARE FDIC INSURED UP TO $100K per person. So, you'll eventually get your money back IF there's a problem...just might take awhile.

As of this moment...there's been ZERO NEWS COMMENTS ABOUT ANY BANKS BEING UNABLE TO MEET MONEY MARKET OBLIGATIONS!

It is a good time, however, for many of us to get a good education in our country's banking system. It's not as fool proof as most of us are led to believe. For instance, there's no way that FDIC has anywhere near enough money to pay out all deposits if a major, money center bank tanked.

We're all learning about "discount windows", Fed Fund Rates, Commercial Paper, Debtor-in-Possession, etc. & that's a good thing we all should know.

As I'm typing...the Dow is -307. It's been interesting watching some of the Yen Carry Trade unwind today. Gold closed down 22 (easy to sell, very liquid).

Tricia
richard_f
16 years ago
Money market mutual funds, like the type offered as part of a brokerage account (Fidelity, Vanguard, etc.) are not FDIC insured. Historically, the fund companies have absorbed any loss in the value of the underlying assets so that the share value remains constant at $1.00. The large money market funds are highly diversified, so even if some of the assets lose value and the fund doesn't buy them out, the drop in share price is likely to be very small.
mfbenson
16 years ago
If your lender goes under after they have approved you for a loan but before you sign for a house at closing, its a different story. You'd be SOL.

Countrywide, the largest lender in the USA, responsible for 1 out of every 5 mortgages, has lost access to commercial paper (the largest source of liquidity) and had to tap a credit line just to be able to write new mortgages. When your lender has to become a borrower just to be a lender, does it not raise eyebrows? When it is the largest lender in the country doing this, does it not raise blood pressures?
Boopadaboo
16 years ago
So the question is - who to use for a mortgage? I have always used Countrywide! I need to get going on a mortgage this week.
triciae
16 years ago
No, no, no.....

Unless a lender is a depository institution...all of them use BORROWED FUNDS TO MAKE MORTGAGES!

Countrywide has a $11.5B unsecured Line of Credit with 40 participating lenders that they drew down ENTIRELY this morning. This line of credit is their emergency fall-back position & they've used it to stay in business. It's not a good situation but it's also not necessarily "lights out" for Countrywide.

Countrywide IS STILL MAKING CONFORMING MORTGAGES! So, if you're under $417,500; have a FICO of around 790 or above; have a 20% down payment; & can provide all documentation...you'll be able to get a loan from Countrywide. BUT, THEY SAY ON THEIR WEB PAGE THAT THEY HAVE MOVED ALL LENDING TO THE BANK. So, the process might be a bit different.

Yesterday, Countrywide's commercial paper was going for 12.5%. Obviously, they can't pay that & still fund mortgages. So, they've pulled down their line of credit.

It should NOT raise eyebrows that your lender borrowers to lend you money. That's how the mortgage industry works. Again, the ONLY lenders who do not do this are depository lenders such as BAC, WF, etc.

Tricia
triciae
16 years ago
IndyMac is saying on their webpage that they are still making alt-As. That's pretty hard to believe but I guess they're funding them through the bank. So, if you can't get funded through Countrywide...call IndyMac.

/t
mfbenson
16 years ago
"It should NOT raise eyebrows that your lender borrowers to lend you money. That's how the mortgage industry works."

Ok, fine, I oversimplified it. But the fact remains that Countrywide is borrowing money at more expensive rates on their credit line than they previously would have been able to get in the commercial paper market. One way or another that has to have an impact - either countrywide will have to raise the rates it lends at (and make itself less competitive in the process) or it will have to find some asset (probably loans that it has already written) and sell them to someone else to raise cash reserves to be able to get commercial paper at more reasonable rates.

"So, if you're under $417,500; have a FICO of around 790 or above; have a 20% down payment; & can provide all documentation...you'll be able to get a loan from Countrywide."

Uh huh. And what percentage of buyers can do that? Selling a house will be ever-tougher...
Boopadaboo
16 years ago
I think I am going to try USAA instead. I don't want any issues with this! It sound like countrywide might be the same as USAA now in terms of rates anyway. Used to be they were slightly lower I believe.
aphilla
Original Author
16 years ago
I was just wondering operationally what would happen if the company that holds my mortgage went under. Countrywide doesn't happen to be it for me. I assume in the long term someone else would end up with the loan (an asset) but don't know what happens in the short term.

It doesn't raise eyebrows or blood pressure that the largest mortgage lender borrows money in order to loan money. That seems like a perfectly good business to me if you can make money on the difference between what you pay to the people you borrow from and what you are paid from the people you loan to. I mean, isn't that how the whole thing works for banks in some abstract since (paying the depositors interest for funds which the bank in turn invests).

And it doesn't surprise me that when such lenders loan to people with a questionable ability to pay find themselves in a great deal of difficulty!
triciae
16 years ago
Hopefully, Thornburg will pull through this. I traded them short this week but I'd like to see them survive. Might be awhile before they pay $.68/share again?? lol

/t
mfbenson
16 years ago
"It doesn't raise eyebrows or blood pressure that the largest mortgage lender borrows money in order to loan money."

Would you prefer if I stated it as the interest spread going negative? When the spread is negative, the lender is borrowing money even in net of the interest they receive from customers. That makes the lender into a net borrower. It is not a sustainable business position, and should raise eyebrows.

People seem more and more interested in nitpicking a turn of phrase lately. I'm full of odd turns of phase. To me, someone who borrows more interest than they earn is a "borrower". A lender who still makes money on the interest spread is still a "lender".

Thus, a lender who becomes a borrower just to keep up the act of being a lender raises my eyebrows. But nevermind. Its just me.
aphilla
Original Author
16 years ago
I don't think Tricia was nitpicking to respond to what you said. Or me, if it was directed to me....

You apparently typed one thing while thinking of another.

And I agree that if you add the clause that it costs you more to borrow than to lend, you don't have a sustainable model.
kec01
16 years ago
mfbenson, I'm with you and I've worked in banking and investments for 30 years. You and aphilla are right in that ALL lenders (banks, S&Ls, mortgage companies - all lenders) borrow so that they can make more loans. That's the basic nature of the financial services industry. Even BAC and WF have been known to borrow from their bank parent.

Deposits that are held in national banks are FDIC insured up to $100,000. Money market funds at Fidelity, Vanguard or any other private sector money market fund are not FDIC insured nor are they insured by any other federal agency.

Chances are high that most of our mortgages were already sold or committed to be sold/securitized by the time we sat at our closings. If a lender goes belly up, nothing has changed in our obligation to repay the mortgage. We make a monthly payment until our obligation is satisfied. Yes, we may be instructed to send our payment to another PO box or bank account, but that's a small operational detail in the big picture. And, yes, a loan could be called but I'd wager my entire net worth that that won't happen to the average residential mortgage.
rrah
16 years ago
boopapadoop---my USAA clients have always been very pleased with the service they have received.
beachlily z9a
16 years ago
USAA rocks! They have a huge part of our portfolios and they better stay in business or I'll have trip to San Antonio! I trust USAA and they've been the best in the business! GO USAA!
Boopadaboo
16 years ago
Good to hear. thanks! I do my banking with them and have my insurance with them and got my preapproval certificate this morning in 5 minutes. Seems like it will be the safest way to go!
sparksals
16 years ago
Add me to the USAA camp. We have slowly moved most of our finances over there - credit cards, car/home insurance, banking, some IRA's and they have our mortgage. They sold it shortly after, but what's great about it is we still call USAA when we have a question. It was sold to GMAC but I've never had to deal with them.

Also, USAA will match rates, so if you have a quote for something lower, they will work with you.

beachlily - I'm impressed with how our IRA has done with USAA. I also put an inheritence into a MMA to have access, but gain interest. If I need the money, it's a matter of a transfer or writing a cheque. I love it! The rate may not be the best out there, but the convenience is worth it to me.

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