What If Your Mortgage Lender Goes Bust

Editor's note: This is the third in a three-part series on the mortgage crisis. Part 1 showed that mortgage lenders haven't cleaned up their risky ways despite the carnage; part 2 examines the root cause of the current crisis, and what could happen going forward.

Are you sick of all the talk about the subprime-mortgage fiasco? I know I am.

Unfortunately, it's not going away. So we have no choice but to deal with it.

After all, it's not just affecting consumers who took out loans they can't afford; the lenders that were, dare I say, stupid enough to offer those unqualified borrowers those loans are getting hit too.

American Home Mortgage of Melville, N.Y., recently filed for bankruptcy protection. Once the nation's 10th-largest mortgage lender, the company said "extraordinary disruptions" (read: people not making their mortgage payments) effectively cut off the money it needed to make new loans.

It's not alone. Dozens of other mortgages lenders that cater to borrowers with less-than-stellar credit are in the same fix. This week alone, Lehman Brothers (LEH - Cramer's Take - Stockpickr), Capital One (COF - Cramer's Take - Stockpickr) and Accredited Home Lenders (LEND - Cramer's Take - Stockpickr) have all closed big mortgage companies.

So what do you do if your mortgage is with one of these sinking companies? Or worse, what if you're in the midst of the application process and find out your mortgage company is shutting its doors?

Scream.

Then read on.

Your Lender Might Go Away But Your Loan Won't

First, let's understand what happens to your loan when your lender admits to having financial problems.

First of all, the lender that gave you your mortgage may no longer own it. Even if you're sending checks to the same place each month, the original lender may just be "servicing" your mortgage on behalf of the new owner.