Mortgage Lender Gone Belly-up? Here's help!

Usually, it's borrowers, not lenders, who get into credit trouble and face foreclosure. But these days, in the wake of the mortgage industry's subprime implosion, your mortgage company may go bust. Here are some tips on how to handle such a situation.

Even major players in the mortgage business-including Countrywide, the nation's biggest lender-are skating on thin ice as the mortgage industry suffers a meltdown. Many smaller lenders, and even a few of the big ones, have already closed their offices and declared bankruptcy. When this happens, it can create confusion and consternation for homeowners whose lenders have vanished.

Great expectations

Your loan may be temporarily in limbo, but it still lives, even if your lender doesn't. Here's what to expect (until things normalize) if that happens to you:

• Customers of the outgoing mortgage company will get a farewell letter that also introduces them to the company or government agency that will assume day-to-day operations.

• The letter will likely include contact information to use in case you need customer service on your mortgage. Look for instructions regarding when and where to send your monthly payments.

• First and foremost, don't stop making payments. Find out who's handling your loan and make your payments in a timely manner. The new lender will have the right to foreclose if you're delinquent.

• If you've been approved for a loan that has not yet closed, you might be subject to changes in terms under the new lender. Ask them exactly they're going to be, and have your real estate attorney review the new paperwork.

Learn from past experience

During the savings and loan crisis of the late 1980s, dozens of financial institutions bit the dust. Bigger banks bought up weaker ones. Sometimes, the big ones collapsed, as well, leaving the federal government holding the bag. Many banks didn't even bother to buy new signs to go on their buildings because, by the time the sign arrived, another bank had taken over operations. If you had a checking account in those days, the bank name printed on your checks might have been rendered obsolete.

Some mortgage companies lost entire files during the chaos. There were cases of homeowners who never made another mortgage payment because new lenders forgot about them. But don't get your hopes up for a freebie. A better approach is to stay alert and responsible to protect your loan and your real estate investment.

If a new company takes over the servicing of your loan, they're required to notify you within 30 days. They may need a month or two to switch over the accounts, and if they ask you to delay sending a payment during the transition, set aside the funds. If you spend the money and then can't catch up on your payments, you might wind up in default. That's when their troubles end, and yours begin.