Is Your Mortgage in Trouble?

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Not Worry-Free

Of course, no borrower is immune to the logistical problems that can accompany the bankruptcy process. "There is the risk that if lenders are going out of business, sometimes the new servicing arrangements need to be arranged, and there can be systems-related slippage," says Donald Lampe, chairman of the American Bar Assn.'s consumer financial services committee and a partner at Womble, Carlyle, Sandridge & Rice in Charlotte, N.C. "But I would say those problems are not common."

Others say you can never be too careful. "They have to obtain all those records on a computer file, it takes days or a week or more, and [at] some time in that process you may send a check to the wrong address and you end up showing up 30 days delinquent on your mortgage," DeLaney warns. "My advice would be to be very proactive." You might want to forget about your mortgage, but if your statement is late, even by a few days, it's probably a good idea to call your mortgage company and track it down.

Some companies are only mortgage originators, but most of the big mortgage companies—including Wells Fargo (WFC), Countrywide (CFC), and American Home—service the loans even though most are actually owned by investors. At the time of its bankruptcy, American Home was servicing $50 billion in loans, so its customers should be particularly concerned about possible problems, DeLaney says.

Worst-Case Scenario

Maybe you've been pre-approved for a mortgage, are ready to close on a house, and have just discovered that your lender is no more. Then what? In some cases, another lender will step in and pick up the business right away. On the same day American Home Mortgage filed for bankruptcy, Atlanta-based HomeBanc (HMB) said it was facing a liquidity crisis and would sell up to five branch offices to Countrywide Financial.

This is not a common scenario, according to Lampe, but it is an unfortunate one. "If your lender goes bankrupt, you don't have a lot of immediate legal recourse against the lender," he says. "As a practical matter it can be very frustrating and taxing. There are going to be a lot of borrowers that have difficulties."

American Home Mortgage has said it has $300 million in mortgages promised to pre-approved homebuyers that it will not be able to finance. If you're really angry, you can sue them down the road, but it probably won't be worth it. "It's basically a small claim and not worth the legal fees," says DeLaney. "All you can do is jump up and down and scream, buck up, and go bring your money somewhere else."

If you are among the 60% of borrowers who use a mortgage broker instead of going directly through the mortgage company itself, DeLaney recommends talking to your broker about other back-up options. Unfortunately, as more and more lenders go belly-up and lending standards tighten, you may not have as many options as you had before—in fact, you may not even be able to find your broker.

Click here to find out which states have the highest foreclosure rates.

Roney is Real Estate writer for BusinessWeek.com.