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), Capital One ( COF) and Accredited Home Lenders ( LEND) 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.
That owner could be another lender, or it could be a private investor -- mortgages are often bundled together in a process called securitization to serve as collateral for other kinds of debt. In either case, you have to keep making payments. If the original lender still holds the mortgage, two things can happen. The lender could decide that, while it won't take on any new loans, it will just continue to service existing loans like yours. In that case, just keep making your payments. A lender in dire straits might also try to sell some or all of the loans to raise some cash. That means you'll be writing your monthly mortgage check to someone else. Bottom line: Regardless of what happens to your mortgage company, your loan does not go away. Keep making your payments, even if it is to a new address.
Now Run for the Hills
Even if you're not off the hook for your mortgage, the minute you hear your lender is in financial straits, you might want to start shopping around for another loan. If your mortgage company does try to sell your loan, your paperwork could get juggled, you might not get the new billing address in time, and then your mortgage payment will considered late, says PeggyAnn McConnochie, vice president of the National Association of Realtors.
And you know that a late mortgage payment is a big black mark on credit. While it might not be your fault, you don't want to fight the fight of trying to clear your name with the credit agencies. So attempt to get a loan with a stable loan company (which seems to be an oxymoron these days). Just don't go on the Web! Lendingtree.com and Ditech.com may offer ridiculously cheap loans, but then they hit you with exorbitant fees and penalties that are barely disclosed in the offerings. "They're like the slimy car salesman," says McConnochie. "Too many people get loans on the Web without knowing the whole story." Start with your local bank, and get a real person in front of you. Ask questions. Make sure you understand the specifics. Get a good-faith estimate and compare it with your other offers. Now, if you're in the middle of the mortgage application process and your lender decides to shut its doors, I'm sorry to say you're out of luck. There's basically nothing you can do but move on to another lender. Any fees you paid, for credit applications, appraisals, etc., are all sunk ... lost ... gonzo. Not to mention the time you invested in trying to get the loan. However, if you still want to buy the home, you should immediately contact the sellers. Odds are they're selling their home to you because they know you can get a mortgage. Well, right now, you don't have a mortgage because your lender is going belly-up. If you still want the house, ask the seller for an extension on your contract so you have time to get another loan without losing the house. "Get an addendum that gives you the right to get a loan somewhere else," suggests McConnochie. You clearly need more time to get pre-approved for a loan now. So don't panic if your mortgage company decides to shut its doors. Just be proactive and get yourself out of there ASAP. And this time, get yourself into a fixed-rate loan. The interest rate may be a bit higher, but in the long run you'll sleep better.