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As mortgage lenders implode right and left, plenty of people are getting nervous about what might happen to their home loans. And some have good reason to be.
One bankrupt lender, American Home Mortgage Investment, was accused by mortgage agency Freddie Mac of failing to pay property taxes and insurance premiums on 4,547 home loans valued at $796.8 million.
Freddie Mac warned that American Home's failure to make timely payments on those obligations, which the mortgage company had handled on behalf of borrowers, could lead to lapsed coverage, tax penalties and perhaps even foreclosures.
Freddie Mac and American Home eventually reached a settlement to cover the overdue payments, but the dust-up highlights the importance of being vigilant about your mortgage.
It's not their problem -- it's yours
Let's start with some basics that everyone should know about mortgages:- Most home loans are quickly sold. That was true even before the subprime-mortgage meltdown, said mortgage expert Jack Guttentag, a syndicated columnist who runs the Mortgage Professor Web site. Lenders typically sell mortgages shortly after they're made. Often, loans are bundled together and sold to investors in a process known as securitization.
- Servicing rights may also be sold. The ability to take your payments and pass them on to investors, known as a loan's servicing rights, is also a valuable asset. If you're paying 7% for your loan, for example, a servicer might take a quarter-point of that interest rate as a fee and pass the remaining 6.75% along to the loan's owner or to investors.
- The sale of your loan or its servicing rights doesn't change your obligations. Your interest rate and payment terms are spelled out in the loan documents you signed. If you don't abide by that agreement, whoever owns your loan can start foreclosure proceedings.
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And rest assured, someone will own your loan even if your lender goes belly-up, because loans are a valuable asset. Whatever mortgages the lender still retained will wind up being sold as part of the bankruptcy.
The same is true of servicing rights: Somebody's going to want to take your payments.
- Video: Suing mortgage lenders
Mortgage experts don't expect the pace of loan sales to change that much because of the current mortgage-market turmoil. Most of the troubled lenders were in the practice of immediately selling all the loans they made anyway.
But servicing rights may be more likely to change hands, said Elizabeth Razzi, the author of "The Fearless Home Buyer," as troubled companies try to raise cash or as the companies servicing loans go under.
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