When the Bank 'Loses' Your Loan, Keep Making Payments -- and Keep Records

Q: Last month, I made my mortgage payment to XYZ Mortgage as usual. A few weeks later, the payment was returned with a note saying that my mortgage had been sold to ABC Mortgage. However, when I contacted ABC, they said they had no record of my loan. I have not made my payment for last month or this month, and next month's payment will soon be due. I have an escrow account for the payment of taxes and insurance, but I just received an overdue notice from the tax department. What should I do?"

A: When mortgages are sold, bad things occasionally happen, but I have never heard of a mortgage disappearing entirely. I'm glad you are not entertaining the possibility that the mortgage will never be found and thus you won't have to pay it off. It will be found, of that you may be sure, and when it is you will be expected to make all the payments you missed.

Here is what I would do if this happened to me:

· Pay the taxes and insurance as they come due. Pay even though you have already made payments into escrow accounts out of which the lender is supposed to make the payments on your behalf. The lender is responsible for making these payments -- that was part of the deal under which you agreed to fund an escrow account under the lender's control. But pay anyway; it may save you a lot of grief.

For example, if your insurance policy lapses and subsequently you have a costly fire, the lender who finally acknowledges that it owns the mortgage probably will not acknowledge responsibility for the failure to pay the insurance. Recourse will require taking the lender to court, which you want to avoid.

· Create a segregated bank account in the name of the mortgage and make payments into it. This maintains your budgetary discipline -- you will have the money to pay when you need it. It also demonstrates your good faith if, despite your best efforts, your case ends up in court, which is always possible.

· Keep a record of how your loan would be amortizing had the payments been going to the lender. This is to assure that the loan balance they finally get around to recognizing is correct; it should give you full credit for all principal payments, and there should be no late fees or other charges. Any interest earned on the special account should belong to you.

· Create a file containing a chronology of events. Include all the evidence of your attempts to find the owner of the mortgage, including what you were told by each party, and when. Get them to put it in writing if they haven't yet done so.

· Get a copy of your credit report. Get an updated copy every month until the affair is settled. If a report is being submitted to the credit bureaus about the loan, you would find out which lender is reporting it. Use this information to prod the lender to recognize that somewhere at the firm is a person (or a computer) that knows about the mortgage.

· Push the lenders. If nothing appears on your credit report, go to a higher level at the lender that is claiming it sold the mortgage. Insist on documentation of the sale. Then present this evidence at a higher level of the buying firm. "Here is the evidence that you purchased my mortgage; now how about finding who swallowed it in your organization?"

When the responsible party finally emerges, the mortgage holder must accept the payments made to your bank account at face value, making the mortgage current in line with the amortization schedule. In addition, it must refund from the escrow account the tax and insurance payments that you advanced. The mortgage holder ought to pay interest on the advance, but it won't.

Your communications with the responsible parties should take the form of "qualified written requests" under Section 6 of the Real Estate Settlement Procedures Act. Full instructions on how to submit such requests is on my Web site in the article, "Is There Recourse Against Bad Mortgage Servicing?" ( http://www.mtgprofessor.com/A%20-%20Servicing/is_there_recourse_against_bad_servicing.htm). This procedure puts the lender on notice that you know what you are doing and will be vigilant in protecting your rights.

Jack Guttentag is professor of finance emeritus at the Wharton School of the University of Pennsylvania. He can be contacted through his Web site, http://www.mtgprofessor.com.

© 2008, Jack Guttentag

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