- The Washington Times - Friday, September 14, 2007

I have received several e-mails recently from homeowners concerned about what would happen to their mortgage if their current lender went bankrupt.

The subprime mortgage meltdown and subsequent credit crunch have been top news for several weeks. It’s no wonder homeowners are concerned.

Let me try to explain the likely impact of the current crisis.

First, if a homeowner’s lender or loan servicer goes bankrupt or shuts down, that does not change his obligation to pay the mortgage as agreed.

Remember that a mortgage promissory note is a contract, signed by the lender and the borrower. The lender’s contractual obligation is to provide the funds to the borrower, which occurs at settlement. The borrower’s contractual obligation is to repay the loan under the terms specified in the promissory note.

The borrower is obligated to meet these terms regardless of what happens to the lender.

Practically speaking, though, most mortgage loans are sold on the secondary market, usually to Fannie Mae and the Federal Home Loan Mortgage Corp. (Freddie Mac), the two giant companies that buy mortgage loans from lenders.

Fannie Mae and Freddie Mac then package these loans into mortgage-backed securities and offer them to investors.

It’s possible that a homeowner’s mortgage loan can wind up in a mortgage-backed security pool that makes up part of the same homeowner’s 401(k) retirement investment portfolio.

When a homeowner applies for a mortgage, one of the many forms signed is a Servicing Disclosure Statement. This disclosure is supposed to give the mortgage applicant notice that the lender has the right to sell the loan and the servicing rights to another investor.

Loan servicing is the process of collecting the principal, interest and escrow account payments.

Remember that a mortgage loan is an asset to the lender. If your lender shuts down or goes bankrupt, its assets, including the outstanding mortgage loans, are transferred to other parties.

A borrower will indeed receive notification if his mortgage loan is transferred to another party.

I also have received several e-mails and calls from existing clients who have mortgage applications in process with my company. They hear about lenders dropping like flies in the media, prompting them to contact me with a simple question: “Henry, is my loan in any danger of not getting funded on my scheduled settlement date?”

Luckily, in my case, I can safely answer, “No, your loan will absolutely be funded.” My company only originates “A” credit conventional mortgage paper.

Though some lenders offering conventional loans are tightening their documentation guidelines, the money is still widely available.

This is very important for consumers to understand. If you have good credit and funds for a reasonable down payment, plenty of mortgage money is available.

The subprime market is a different story. Mortgage money for folks seeking loans who have poor credit histories is much harder to find. If a reader has a subprime loan in process with a mortgage broker or lender, it indeed would be wise to get reassurances from the broker or lender that the funds for the type of mortgage applied for is still available.

The mortgage industry is in the middle of a consolidation and restructuring. Though the subprime market has shrunk considerably, there still is plenty of demand for conventional paper.

There are clear signs that the strength of the overall economy is weakening. How much the subprime meltdown has contributed to this weakness is up for debate, but a weaker economy tends to cause long-term interest rates to fall, which already is happening.

Is there another refinancing boom on the horizon? Time will tell. Stay tuned.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by

e-mail (henrysavage@pmcmortgage.com).

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