Lender Gone Under? Here's What To Expect.

By Jeremy Herron
Associated Press
Saturday, August 4, 2007

NEW YORK -- Another well-known mortgage lender is in serious trouble. American Home Mortgage said this week that its creditors had pulled the plug amid the worsening housing slump, which could force it into insolvency.

But what does it mean for borrowers when a lender goes into bankruptcy?

Here are some questions and answers about whether and how troubles at a lender can affect homeowners:

Q What happens to my mortgage if my lender goes bankrupt?

A When a lender goes under, it does not mean its assets -- in this case home loans -- are worthless. The company, under court supervision, would sell the assets and use the proceeds to repay its creditors.

That means your loan would wind up with another financial institution.

"Generally, the consumer is not going to be affected," said Ray Hooper of the Consumer Credit Counseling Service of Greater Dallas.

It is unlikely that your originator still owns your mortgage anyhow.

So who does own my mortgage?

That is nearly impossible to say -- and it doesn't really matter to you as a homeowner.

While it is possible that the bank you dealt with still has your mortgage on its books, most lenders simply originate loans. They then package them together and sell them to a bank in a bundle.

In many cases, that bank repackages a group of bundles and sells them in the securities market as mortgage-backed bonds or other complex financial instruments. So your $250,000 loan could be just a small fraction of a $500 million bond, shares in which are held by hundreds or thousands of investors.

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