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I read some answers given to people worried about the consequences if their mortgage lender goes broke. The incomplete answers are probably a result of not enough space in a newspaper article. If we as borrowers are responsible enough to ask questions, do not patronize us with “Pay your bills, and don’t worry about it”. Situations may effect mortgages that require borrowers to intervene on their own behalf.

If I have a mortgage with a loan company that went bankrupt, what should I do?

Continue making your payments as instructed. Maintain your records of the original mortgage contract and payment history, confirm your taxes and insurance are paid as agreed.

Often your only contact with the lender is through their mortgage service provider (servicer). The role of servicer may be retained by the lender or contracted to a different company. The servicer performs customer service, billing (provides your statement), account receivables (processes your payment), accounts payable (retains the escrow balance for tax and insurance payment), and records keeping.

You should be notified of a change of servicer to ensure there is no interruption in the cycle. Your notification of change will include the effective date, name of new servicer, and mailing address for the payment. If you use on-line bill pay or have authorized the previous servicer to draft your account for payment update the information.

When you get a statement from the new servicer, compare your account information. If inconsistencies exist between the statements provided by the different servicers, contact the new servicer for clarification and instructions on how to submit corrections.

What happens to my loan?

Nothing happens to your loan that you can control. Loans may be selected for retention, pooled and sold in asset backed securities, or returned to the lender. Loans are traded like baseball cards. You are unaware of the secondary market transactions unless the servicer changes.

If I have a loan with a company like Countrywide, should I be worried about my mortgage?

You should be alert, but no more worried than usual.

Does the type of loan I have change these answers? For instance, if my loan is an adjustable-rate mortgage or an even more exotic type of loan?

The previous answers will not change because of differences in your loan. If you have an adjustable rate mortgage (ARM) you should be revise your budget and prepare for higher interest rate payments before the mortgage reset.

Compare your present payment with a “worst case scenario” future payment after the reset. Services of mortgage calculators are free on line. While not absolutely accurate it is much better prepare than have no budget. Begin depositing the difference into a savings account, separate from your household operating expenses. If you are unable to deposit the full difference between the two payments, then deposit what you can while reducing your household expenses or increasing your income. Increase the amount you can deposit for the future payment every month until you can deposit the full difference between your present and future adjusted payment. Keep making the monthly deposit until the mortgage payment resets then you can use it to make the payment.

If your ARM mortgage has a clause that allows you to convert to a fixed rate, consider doing so before the reset. Theoretically, by implementing the above plan, you may have saved enough to lock a fixed rate into your existing mortgage.

Everyone is glib about the refinancing into a new fixed rate mortgage, the advice is just refinance. They are referring to last years standards. If your mortgage resulted in reverse amortization, total debt exceeds the value, or you have been late on payments, you may not qualify for a new mortgage. If you attempt to refinance into a new mortgage prepare to provide more documentation. The required documentation may include W-2 earnings statements, two or more months of bank statements, and tax returns. Interest rates, mortgage insurance premiums, and origination fees are higher now than 2 years ago. Your payment will probably increase.

Are there steps I can take now to protect myself against future problems?

Make a plan, prepare, protect your credit rating, and prove your worth.

Can the terms of my loan be changed if it is sent to a new loan processor?

Your mortgage is a binding contract between you the borrower and lender. The terms of the contract can not change without approval by both parties.

This does not mean that mistakes are not made in the transfer process to the new processor or servicer. You will need to compare account information provided by both servicers. Verify the term (length of the loan), interest rate, and balance in the escrow account. The burden of proof rests on the borrower. You will need to identify discrepancies, report problems to the mortgage servicer, and provide necessary documentation. You may need to submit a copy of your original mortgage, mortgage loan statements, proof of payment, etc. to the mortgage servicer/lender in order to make corrections. If corrections are not made accurately or in a timely manner, you should report the problem to the regulating agency that provides oversight and enforcement for the lender.

What about loans in the pipeline when a mortgage broker / lender / orginator goes under?

Primary importance of this question is a better understanding of what the pipeline means to you, the borrower.

Mortgage pipeline: The period from the taking of applications from prospective mortgage borrowers to the marketing of the loans.

Mortgage loans that have been locked in with a mortgage originator by borrowers, mortgage brokers or other lenders. A loan will stay in an originator’s pipeline from the time it is locked until it falls out, is sold into the secondary mortgage market or is put into the originator’s loan portfolio. Mortgages in the pipeline are hedged against interest-rate movements.

A type of risk most often present in mortgage transactions. It expresses the potential for change in financial factors during the time lapse between the mortgage application and the purchase of the property.

Investopedia says: During the time it takes for a bank to review a mortgage application and for a borrower to actually purchase their desired property (the mortgage pipeline), financial conditions specific to the application can change, which would change the amount of risk the bank incurs by lending funds to the borrower.

The above information comes from various online sources.

The pipeline is the time for collective processes to approve and complete the mortgage. The application enters the pipeline when the borrower accepts the terms and commits by signing the application and getting a “lock” for the final product. Locks are for a short term (30 to 45 day locks being the most common). The loan should close within that time period.

Collective processes may include creation and processing the application, requesting your credit history from credit reporting agencies (CRA), evaluation by underwriting, schedule appraisals, title search, securing hazard and title insurance, and find a lender to fund the mortgage.

If the pipeline is broken, the progression will stop and more than likely your loan will not close. You need to be diligent in maintaining contact with the lender and be advised of your current status of your loan application. You may need to submit a new mortgage application to a different lender. In some cases the lender you have been working with may have forewarning and transferred the information to a new servicer or provider. This interruption may cause a delay due to their underwriting criteria and processing non-standard forms. Neither of the situations will damage your credit history.

Do not delay making your other payments because you are waiting for funding. If you neglected paying bills while waiting for the mortgage to close, the information will be reported. Adverse information will be reported to the CRAs. Your credit score will reflect this change and you will be penalized. An application for a new loan may be denied or only approved with higher interest rates.

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