Mortgage Meltdown: Weighing the Threat

The following is a transcript of "Money Girl's Quick and Dirty Tips for a Richer Life," a podcast from QuickAndDirtyTips.com. The audio program is available via RSS feed here and at TheStreet.com's podcast home page.

Hello and welcome to Money Girl's Quick and Dirty Tips for a Richer Life.

Today's topic: How does the mortgage meltdown affect existing mortgages?

A listener named Don emailed me with this question:

The banks have decided to quit lending money to the mortgage company that holds both my mortgages. My question: how does this affect me (and those of us who have our homes mortgaged by the company)? According to the news, the company in question is one of the nation's biggest. If they go bust, is it possible that the terms of my mortgages could change? Would the Fed bail out the mortgage company? Am I subject to the whim of whoever buys out the mortgage assets of my current company?

Just wondering how worried I should be at this time.

Thanks for the question, Don!

What Happens If Your Lender Goes Bust?

In the U.S., if your mortgage lender were to go bust, the terms of your mortgage would not change. Another company would take over the loan servicing (that is, continue to send you statements and collect mortgage payments), but the terms of existing loans would hold.

Mortgages During the Great Depression

During the time of the Great Depression, the rules were different and lenders could call a mortgage loan due if they wanted to, and they did. Back then, lenders could demand full repayment of a loan at any time.

When the stock market crashed on Oct. 29, 1929, millions of people who had bought stock on margin (that is, with money borrowed from their brokerage) received margin calls. To cover the margin calls, many of these people went to their banks to withdraw cash.

With this run on the banks, it wasn't long before many banks ran out of cash and resorted to calling mortgage loans due from homeowners in good standing with a history of on-time payments. Because of the stock market crash and high unemployment, demand for homes was low and home prices fell. Homeowners couldn't easily sell their homes to pay off their entire mortgage balances, and many homeowners lost their homes to foreclosure.