Compiled and updated from earlier reporting by TheStreet.com.Countrywide Financial's ( CFC) shares have taken another severe hit this week amid rumors that it was preparing to file for bankruptcy. Countrywide, which has struggled since the summer in the face of a significant pullback in the mortgage sector, accounts for around 20% of mortgage origination in the U.S. Should Countrywide file for bankruptcy, it would further roil a U.S. market that has been deeply stung by a slumping housing market after a heady boom in mortgage origination and homeownership. Whether or not the nation's largest mortgage lender is too big to fail remains to be seen. Countrywide is not alone with its troubles. Dozens of other mortgage lenders that cater to borrowers with less-than-stellar credit are in a similar fix. This raises important questions for borrowers: 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? The crucial thing for consumers to know is that they are still required to make their principal and interest payments, regardless of what happens to their lender. In the case of Countrywide, mortgage servicing -- a unit that works with borrowers to ensure timely payment -- continues to be a significant component of the troubled-lender's operations, generating consistent fee income.
Here are other key things to know about what happens if your lender goes bust.
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, 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.