When Your Mortgage Lender Goes Bankrupt

June 7, 1999, Reviewed July 27, 2009

"My mortgage company is going bankrupt. What happens to my mortgage?"

If you're hoping that your mortgage might go away, forget it. Your debt is a valuable asset of the bankrupt firm that will be transferred to some other firm. And that means that the firm receiving your payment will change.

The firm that receives your payment is the loan servicer, and it might or might not own your mortgage. Most loans today are serviced by specialized servicing agents who do not own the loans they service but collect a fee under a contract with the owner. Transfers of servicing occur with some frequency, occasionally because the servicing firm goes bankrupt as in your case, but more commonly when the servicing contracts are sold.

Regardless of the reason for them, transfers of servicing involve a risk to the borrower because there are sharpsters around who pretend to be the new servicing agent and try and induce borrowers to send their payments to them. You can prevent this from happening to you by confirming the legitimacy of the new firm before sending them any money.

Under Federal law, a firm that is relinquishing the servicing of a mortgage to another firm must notify the borrower of the name of the successor firm along with a physical address, toll-free telephone number, and a specific date when the changeover is effective. The notice you receive from the new firm should conform to the information you received from the old firm.

If there is any discrepancy between the information provided by the alleged new servicing agent and the information provided by the old one, and if you can't clarify it to your satisfaction over the telephone, don't send them any money. Instead, open a new bank account and deposit your payment in that account. This will assure that you won't get ripped off while evidencing your good faith effort to meet your obligation.

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