How a Banking Crisis Affects Your Mortgage
The collapse of Silicon Valley Bank in March — the second-largest bank collapse since Washington Mutual failed in 2008 — and that of Signature Bank days later are continuing to have ripple effects.
Related: 15 Biggest Bank Failures in US History
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In addition to the turmoil in the markets that the regional bank sector has created, consumers also have been left jittery about potential impacts on their personal finances — one of them being their mortgages.
First of all, when a bank fails, the FDIC acts as the “receiver” of the bank, which means it assumes the task of selling/collecting the assets of the failed bank and settling its debts, including claims for deposits in excess of the insured limit.
What Happens to Your Mortgage?
When a bank fails, the FDIC sells the loan at closing or retains it temporarily.
“A mortgage’s vulnerability to the consequences of a banking crisis depends on whether the bank holding the loan is impacted,” said Bailey Moran, a real estate agent and COO of Austin TX Realty. “The mortgage will be transferred to another bank if the first bank experiences problems and fails, and you will need to start making payments to the new lender. You might need to refinance your mortgage with the new bank, depending on the details of the transfer.”
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Contrary to some beliefs, when a bank fails, mortgages don’t magically disappear and your obligation to pay will not change. A few days after the closure, you will be notified by the FDIC and by the purchaser as to where to send future payments.
“You are still required to pay your mortgage under the same terms as before if the bank that holds your mortgage collapses,” said Andrew Latham, CFP and managing editor at Supermoney.com. “In most cases, your mortgage will likely be sold or transferred to another financial institution, and your obligation to make timely payments continues.”
Communication Is Key
Latham notes that communication is important in these instances. Borrowers need to make sure they don’t miss any payments and that nothing gets “lost in the transfer” by maintaining open communication with the new mortgage holder and staying informed about any updates or changes.
“Lack of communication can lead to misunderstandings about payment due dates, payment methods or changes in account details,” Latham said. “This could result in late or missed payments, which may negatively affect your credit score and, in extreme cases, could trigger a foreclosure.”
What Happens to the Terms of the Mortgage?
When a bank collapses and your mortgage is transferred to another bank, the terms of your mortgage, such as interest rates and the repayment schedule, remain unchanged. But you should immediately reach out to the new bank to confirm the details of your mortgage, such as the account number and the address for sending payments.
“By establishing open communication with the other bank,” Latham said, “you can avoid missing any payments and ensure that you’re informed about any changes or updates.”
The bottom line is that it’s important to remember that if a bank fails you should continue to make payments.
For example, on the FDIC’s information page about the collapse of Silicon Valley Bank, it notes in the loan section that you should continue to make payments, “including escrow payments, as usual; the terms of your loan will not change.”
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This article originally appeared on GOBankingRates.com: How a Banking Crisis Affects Your Mortgage
