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PERSONAL FINANCE AT WALLETPOP

SMALL BUSINESS

Is Your Mortgage in Trouble?

Your Lender May Have Disappeared but Your Mortgage Won't

by Maya Roney, BusinessWeek,

Posted: 2007-08-17 11:50:23

More from BusinessWeek.com

By the time American Home Mortgage officially filed for bankruptcy on Monday, Aug. 6, its shareholders had lost nearly everything and over 6,000 employees had lost their jobs. But the company's borrowers now face yet another predicament: What will become of their mortgages?

In most cases of lender bankruptcy, nothing changesat least not from the consumer's point of view. When a lender goes out of business, it sells its assets at a discounted price to another financial institution under bankruptcy court supervision and notifies the borrower about the new servicer. "The effect upon consumers is probably going to be negligible," says Ray Hooper, housing director for the Consumer Credit Counseling Service of Greater Dallas. "It's not going to make any difference at all to the performance of the loan."

No Way Out

If, like an increasing number of home owners around the U.S. today, you were struggling to pay your mortgage and thought your lender's bankruptcy status might give you a freebie, you're out of luck. "You must continue paying your mortgage payment," says Hooper.

Apparently, this is not obvious to all home owners, especially when they are already struggling to make their mortgage payments. "They might just be looking for a way out, and if they're under stress they might just go into foreclosure," says Hooper. "We deal with people like that daily. People will just assume 'Well, these people have gone bankrupt I don't owe them anything anymore.' "

There have been 925,986 foreclosure filings so far in 2007, and that number could exceed two million by the end of the year, according to Irvine (Calif.)-based Web site RealtyTrac. As more lenders go out of business and it becomes more difficult to qualify for a loan, foreclosures are expected to increase. RealtyTrac reports that for 2006 there were 1.2 million foreclosures.

WaitWho Owns My Mortgage?

Truth is, your originator (the firm you got your mortgage from originally) probably doesn't own your mortgage now anyway. Most lenders package loans together in bundles and sell them to Wall Street banks, or to Freddie Mac (FRE) or Fannie Mae (FNM). These companies then often repackage the bundles and sell them on the securities market as mortgage-backed bonds.

But due to rising defaults amid a struggling housing market, banks don't want to buy certain risky mortgages from lenders anymore, which is one reason why American Home Mortgage and other lenders such as Onwit Mortgage Solutions, ResAME Mortgage, Mortgage Lenders Network, and New Century Financial have gone bankrupt this year.

Most of these fallen lenders catered to subprime borrowers, but Melville (N.Y.)-based American Home Mortgage specialized in adjustable-rate mortgages and Alt-A customersborrowers unable to document their income who are considered riskier than prime borrowers but less risky than subprime.

Banks that lent American Home Mortgage money, which include UBS (UBS), Bear Stearns (BSC), and JPMorgan Chase (JPM), said they were cutting off the lender since buyers on the secondary market didn't exist anymore. "The whole process really shut down" says Stephen DeLaney, an analyst at JMP Securities in Atlanta. "There was no home for the loans." The company's ensuing bankruptcy confirmed fears that problems in the mortgage market had spread beyond the subprime market.

Not Worry-Free Of course, no borrower is immune to the logistical problems that can accompany the bankruptcy process. "There is the risk that if lenders are going out of business, sometimes the new servicing arrangements need to be arranged, and there can be systems-related slippage," says Donald Lampe, chairman of the American Bar Assn.'s consumer financial services committee and a partner at Womble, Carlyle, Sandridge & Rice in Charlotte, N.C. "But I would say those problems are not common."

Others say you can never be too careful. "They have to obtain all those records on a computer file, it takes days or a week or more, and [at] some time in that process you may send a check to the wrong address and you end up showing up 30 days delinquent on your mortgage," DeLaney warns. "My advice would be to be very proactive." You might want to forget about your mortgage, but if your statement is late, even by a few days, it's probably a good idea to call your mortgage company and track it down.

Some companies are only mortgage originators, but most of the big mortgage companiesincluding Wells Fargo (WFC), Countrywide (CFC), and American Homeservice the loans even though most are actually owned by investors. At the time of its bankruptcy, American Home was servicing $50 billion in loans, so its customers should be particularly concerned about possible problems, DeLaney says.

Worst-Case Scenario Maybe you've been pre-approved for a mortgage, are ready to close on a house, and have just discovered that your lender is no more. Then what? In some cases, another lender will step in and pick up the business right away. On the same day American Home Mortgage filed for bankruptcy, Atlanta-based HomeBanc (HMB) said it was facing a liquidity crisis and would sell up to five branch offices to Countrywide Financial.

This is not a common scenario, according to Lampe, but it is an unfortunate one. "If your lender goes bankrupt, you don't have a lot of immediate legal recourse against the lender," he says. "As a practical matter it can be very frustrating and taxing. There are going to be a lot of borrowers that have difficulties."

American Home Mortgage has said it has $300 million in mortgages promised to pre-approved homebuyers that it will not be able to finance. If you're really angry, you can sue them down the road, but it probably won't be worth it. "It's basically a small claim and not worth the legal fees," says DeLaney. "All you can do is jump up and down and scream, buck up, and go bring your money somewhere else."

If you are among the 60% of borrowers who use a mortgage broker instead of going directly through the mortgage company itself, DeLaney recommends talking to your broker about other back-up options. Unfortunately, as more and more lenders go belly-up and lending standards tighten, you may not have as many options as you had beforein fact, you may not even be able to find your broker.

2007-08-17 11:47:03

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19 comments

jurban1027 08:03:00 PM Sep 18 2007

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are there really people out there that stupid who think they don't have to pay their mortgage because their lender went out of business? Yes, there probably are and that is why we are all paying the price for their stupidity!

punimpie 11:36:35 AM Sep 09 2007

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DrLuch,
Thank you for being so frank. No, we didn't have a lawyer present at closing, and now realize how foolish we were to believe "ALEX THE THIEF" when he said there was no need for one. I am so ashamed at what we had done, believing in someone we did not know, and being taken in the worst possible way. We hope to retire in 2010, and now have to hope our house will sell for what it appraises for now. Is our thinking logical and does it make sense? We cannot see the interest rates going back up in the high teens again.

DrLuch 11:08:50 AM Sep 09 2007

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As a SC attorney, I fully explain every detail of the loan to my clients. I inevitably get a phone call a month from a client saying that I never explained the terms of the loan to them once their payments go up. I then pull out my CYA letter, where I have them write down the terms of their loan and then have them sign the document. The fact is, they weren't listening to me and were blinded by their desire to buy a house they couldn't afford. Then they eventually tell me their broker or mortgage guy told them I didn't know what I was talking about at the closing, was a bad atty, etc.

Did you have an attorney representing you at closing? If not, did you actually read the note and the truth in lending notice for the biggest debt you ever signed up for? Sorry to be so frank but I see the other side of it every day. Good luck.

punimpie 10:50:54 AM Sep 09 2007

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ready to sell our house in January of 2016. Anyone have insights for us? We had never before been hurt by an arm- except Countrywide's "Thief of the Century" broker Alex. We are hoping not to get hurt 71/2 years from now, also paying multiple principle payments per month. Our $320,000.00 loan is now down to $306,599,and will be down to $306,00. by the middle of this month. What does anyone have to say to us?

punimpie 10:41:37 AM Sep 09 2007

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punimpie 10:35:42 AM Sep 09 2007

Report This! I fully agree with sohpytgthr on Countrywide. The broker was so personable and helpful, and promised to get us the loan we asked for. We had complete trust in him and signed the papers in all the designated papers. It wasn't until 3 months later, when our payments started going up, that I checked further into the mortgage he sold us. We thought we had purchased either a 3 year arm or 5 year arm, and to our utter shock, we were told by Countrywide that we had purchase a monthly arm!
Every month!!!! This is outrageous that Countrywide would even offer a sub-standard loan such as this, so I do not feel sorry for them. And to you Alex, the conniving,lying,personable broker, I hope you rot in hell! Does anyone know if there is a statute of limitations to sue this bum, and do we have a case at all? After all, we were supposed to read over all the papers before we signed, but still thought we bought what he had promised to buy for us. We ended u

punimpie 10:35:42 AM Sep 09 2007

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I fully agree with sohpytgthr on Countrywide. The broker was so personable and helpful, and promised to get us the loan we asked for. We had complete trust in him and signed the papers in all the designated papers. It wasn't until 3 months later, when our payments started going up, that I checked further into the mortgage he sold us. We thought we had purchased either a 3 year arm or 5 year arm, and to our utter shock, we were told by Countrywide that we had purchase a monthly arm!
Every month!!!! This is outrageous that Countrywide would even offer a sub-standard loan such as this, so I do not feel sorry for them. And to you Alex, the conniving,lying,personable broker, I hope you rot in hell! Does anyone know if there is a statute of limitations to sue this bum, and do we have a case at all? After all, we were supposed to read over all the papers before we signed, but still thought we bought what he had promised to buy for us. We ended up refinancing as fast as we could, and will be g

Eyore65499 01:26:29 AM Sep 09 2007

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HERE IS A POINT THAT I WOULD LIKE TO MAKE. i HAD A FREIND WHO GOT A HOME LOAN AND THEY HAD NO CREDIT AND HER HUSBAND HAD JUST GOT OUT OF JAIL AND THEY GOT A LOAN BEFORE MY HUSBAND AND I DID BUT THE ONE THING WAS THAT WE DID IT THE RIGHT WAY AND THEY DID IT THE WRONG WAY AND THEY LOST THIER HOUSE THAT THEY SHOULDN'T HAVE GOTTEN IN THE FIRST PLACE BECAUSE THEY DIDN'T HAVE THE INCOME TO GET A LOAN AND THE PLACE WHERE THEY GOT THE LOAN CREATED FALSE PAPERWORK FOR THEM TO GET THE LOAN!!!!! SO YOU NEED TO TAKE A LOOK AT HOW YOUR GETTING YOUR MORTGAGE JUST MAKE SURE THAT YOUR NOT LIEING ABOUT YOUR INCOME AND THIS WOULDN'T EVEN OF HAPPENED. I EVEN KNOW SOME ILLEGALS WHO GOT MORTGAGES HOW DOES THAT HAPPEN........THIS WHY WE ARE ALL AT RISK NOW....SO SAY THANK YOU FOR ALL THE BULLSHIT. MY MORTGAGE IS SAFE THANK GOD.
JUST A THOUGHT......I STILL WANT TO KNOW HOW THE ILLEGALS ARE GETTING MORTGAGES.....DOESN'T ANYONE ELSE WHAT TO KNOW ALSO?????

bfra980647 12:35:00 PM Sep 08 2007

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This is a sad situation! There are some people who want to re-finance to save their homes, but can't. Requirements for mortgages are greater than in previous years.
If this trend continues, one half of the USA population will be living homeless on the streets, parks, etc.

Juanita (in Missouri)

larryanose 12:04:34 PM Sep 08 2007

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An administration that is oil friendly, conducts a war this is impossible the way it fights it. A government that spends more money on supplies of war rather than caring for their service people while in combat or wounded. The no child left behind program that allows a student no choice in who sees thier information, once they check the no military block for recruitors, and this is only part of what is wrong. Exported employment overseas, curruption in congress I could go on, we are reaping the results of not caring enough ourselfs to be an active part of reform.