Failed Lenders and Mortgage Payback
Here is a rhetorical scenario: You have a mortgage with a bank – either residential or commercial – and the institution fails. Would the bank call in the loan immediately?
The short answer is no. The loan is an asset of the lender, and that asset would be sold to an investor. That said, commercial loan agreements can have language that allows the lender to call the loan, but it certainly wouldn’t be the norm. So, what happens to the loan after the bank fails?
Either the FDIC sold your loan at closing or the FDIC has retained it temporarily. In either case, your obligation to pay has not changed. Within a few days after the closure you will be notified by the FDIC, and by the purchaser, as to where to send future payments. But, what happens if the FDIC decided to sell your loan?
Loans are negotiable instruments that are routinely sold in the financial markets. When a loan is sold, the borrower retains all the rights and obligations associated with the note. The borrower will be notified by the new holder of the note and given payment instructions.
In a bank failure, the FDIC tries to find an “assuming institution” that will take on the deposits of the failed bank. It also attempts to find an assuming institution or institutions for the failed bank’s assets. It may have to split the assets up to multiple purchasers.
Although it’s a bit perplexing, borrowers don’t have to worry about an established loan coming due because their lender failed.
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