What happens to your mortgage if your bank fails?
Your bank failing may seem like a far-fetched scenario, but bank collapses can and do occasionally happen.
If this unlikely event occurs, what protections do you have as a borrower? Can your mortgage terms suddenly change if your bank goes under?
This guide will explain what happens to your mortgage if your banks fails and provide answers to these pressing questions.
Your mortgage protections
The good news is that you have protections as a mortgage holder. Your mortgage is a legally binding agreement, and the new creditor must honor the original terms.
Here's a quick overview of what typically happens to mortgages in a bank failure:
- Your mortgage is transferred to a new bank. This bank will become your loan servicer
- The transfer does not affect your interest rates or other loan terms
- You make mortgage payments to the new bank/servicer
- The funds are transferred to the new bank if there are any escrow accounts for taxes and insurance
- The timing of payments and procedures stays the same
Essentially, your mortgage agreement continues uninterrupted.
Behind the scenes, federal regulators coordinate the hand-off to minimize disruption. For borrowers like you, though, the transition is mainly invisible.
How mortgage transfers work
When a bank fails, the Federal Deposit Insurance Corporation (FDIC) immediately arranges a mortgage transfer to a healthy bank.
The FDIC first looks for a single bank to take over all the failed bank's mortgages. If that doesn't work out, it disburses mortgages individually to many banks.
Within 30-45 days, you'll get a letter from the FDIC informing you about the transfer. The note provides contact information for the new bank that will service your loan.
That bank does not have to re-underwrite or re-qualify you as a borrower. It cannot change the interest rates or principal balance on your loan.
Those terms are fixed based on your original mortgage agreement.
The new servicer can't charge you extra fees due to the transfer either.
The only adjustment you'll need to make is where you send your monthly payments.
Your rights as a mortgage holder
As part of the transfer process, you do have certain rights that are protected:
- No costs for the transfer - You cannot be charged any transfer or processing fees.
- No impact on credit - The transfer does not show up on your credit report or affect your credit score.
- No changes to terms -The new servicer must honor your original mortgage agreement.
- No disruption of payments - The timing of your payment due dates does not change.
- Escrow funds transfer - Any escrowed funds for taxes and insurance move to the new bank.
- Notices required - You must get written statements explaining the transfer details.
After the transfer, you are free to settle your mortgage ahead of schedule.
Some borrowers—wary of a new mortgage servicer—opt to cover the remaining balance. But this is not required by any means.
Bank failure can happen
Bank failures peaked during the 2008 financial crisis and have been relatively rare over the past decade. But again, they can and do happen.
Here’s a real-life example.
In October 2021, Home Savings Bank, located in Cincinnati, shut down.
Right after, its deposits and mortgages were transferred to Butler Federal Bank.
A few things stand out from this bank failure:
- Only around 2,000 mortgages needed transferring. A fairly small portfolio
- The FDIC sent borrowers notices of the transfer within a month
- Butler Federal quickly set up systems to service the new mortgages
- Borrowers did not face any changes to loan amounts, rates, or terms
- No disruptions to borrowers were reported
In this example, the safeguards that shield mortgage holders from harm worked like a charm. The FDIC coordinated the hand-off successfully with no issues.
Steps to take if your bank fails
As discussed, the mortgage transfer process aims to be invisible to borrowers after a bank failure. But it still doesn't hurt to prepare.
Here are some proactive steps to take just in case your bank collapses:
- Review any notices from the FDIC and new servicer about transfer details
- Update payment info if needed to send mortgage payments to the new bank
- Verify escrow account funds moved successfully to the new servicer
- Watch for changes to your loan in terms of rates, fees, due dates, etc. Report any discrepancies from your original agreement
- Research new servicer online for reviews, complaints, and financial strength ratings if concerned
- Explore mortgage refinancing or early payoff if unsatisfied with the new servicer. You have options
Consult an attorney if you encounter any violations of your borrower protections during the transfer process. This is uncommon, but it pays to know your rights in case issues arise.
Having your mortgage bank fail can be unsettling, but protections are in place for borrowers:
- Your mortgage transfers to a new bank seamlessly
- Legal agreements keep loan terms unchanged
- Payments and procedures continue uninterrupted
- Regulators work to minimize any disruptions you face
While bank failures are rare events, it helps to understand the process and your rights.
With the proper safeguards in place, your mortgage should sail through any bumps in the road unscathed—even if your bank collapses.