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Bank Going Bankrupt With Your Mortgage


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This question has been bugging for some time:

What if a bank you have a mortgage with, goes bankrupt? If you are in the middle of a 10 year fixed rate mortgage, do you have to pay back the remainder of the loan to the bank immediately or lose your home? How does it work?

Edited by Fortune
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The way I understand it is your mortgage is an asset of the bank, so if the bank went bust that asset would sold on. It may be sold at less than the original cost/face value (i.e. a 100k mortgage may be sold at 80k) so the interest rate for the new buyer will be higher, but the rate to you stays the same.

I'm not sure about it keeping the fix for you, but I assume it would remain as is. I'm sure the new holder of the debt will do anything possible to add new charges, costs etc on; that can nearly be assumed by the way banks have been acting.

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What if, in a severe depression (haha), there is no-one to bail out the bank i.e. no one to buy out the orginal debt. Would I now have a 'free' house??

thinking logically if the bank completely ceases to exist and all records get destroyed. (i.e. the country gets invaded and the banks files get destroyed) i guess you also get stuffed, as the bank also has the land registry documents in there safe. No mortgage to pay, but equally you don't own the house... The country the property is located takes the property when you die? and they can sell it on at a later date? If your also living in the country that has been invaded, the invaders might claim all property (as has happened in various European islands) for themselves.

any international lawyers around?

Edited by moosetea
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Thanks for asking this, I've been wondering the same thing and still haven't seen a definitive answer. I mean, hasn't this already happened in the US with some 100 odd lenders already going bankrupt? What happened to their clients who were still able to pay their mortgages? Can't we find out? I'm with Nationwide so I would hope I'm pretty safe but I'd be a bit worried if I was with Northen Rock...

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  • 2 weeks later...
Guest muttley
What if, in a severe depression (haha), there is no-one to bail out the bank i.e. no one to buy out the orginal debt. Would I now have a 'free' house??

No way. The assets of the bank will always have some value, so can always be sold on. It's like asking "If I was going bankcrupt and couldn't find a buyer for my house could we call it quits?"

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  • 4 weeks later...

I strongly suspect that if a mortgage lender were to go bankrupt, your obligations would not change. If you had a fix, that fix would (probably) remain... there are various ways that the bank can hedge the fix... and that hedge would be either an asset or liability of the bank and would likely be sold on. Your debt does have some value - even if you are likely to default.

The interesting question is this: When your fix expires, what happens then? What stops a bank dramatically increasing your costs... especially as, with reduced appetite for mortgage risk, you're unlikely to be able to switch to another lender. If, for example, you are paid a salary into your bank account, your bank knows exactly how far it can push you to maximise its profits. If you are solvent, with declining revenues from new business, it is the bank's obligation to its shareholders to maximise its return.

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Thanks for the replies...I think I must of had a premonition in August (with NK and all :) ).

So basically, the gist of it is that there will ALWAYS BE some bank, building society, hedge fund or whatever financial company to take over the bank and hence your mortgage. Even if the value of the bank shares are 1p (worthless) someone will step up to the plate. So all you have to worry about is whether you will get [email protected] at the end of the agreed fix rate....right?

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Even if the value of the bank shares are 1p (worthless) someone will step up to the plate. So all you have to worry about is whether you will get [email protected] at the end of the agreed fix rate....right?

When a company is liquidated, its assets are sold off for the maximum price anyone will bid - their liabilities will be paid of to the extent to which their assets can be transformed into liquid cash.

I am willing to bid a penny for the right to harass you to repay £100K - therefore your mortgage has a value. The bad news is that if a bank goes bankrupt, the creditors are other banks (which would likely make them insolvent) and/or the central banks - and, if a central bank takes a hit, that will seriously effect exchange rates and damage international trade.

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As in any bankruptcy, the liquidator will sell on the insolvent bank's assets for whatever it can get for them. As far as you're concerned the only thing that changes is the name of the payee on your monthly direct debit.

Of course, whoever has bought the insolvent bank's assets will want to maximise the return on their investment and will be a lot less concerned with customer service and customer relations than your bank might have been, particularly if it is a faceless private equity company. They means they would probably charge you a higher SVR and would have no hesitation in making margin calls if they suspected you might have negative equity.

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As in any bankruptcy, the liquidator will sell on the insolvent bank's assets for whatever it can get for them. As far as you're concerned the only thing that changes is the name of the payee on your monthly direct debit.

Of course, whoever has bought the insolvent bank's assets will want to maximise the return on their investment and will be a lot less concerned with customer service and customer relations than your bank might have been, particularly if it is a faceless private equity company. They means they would probably charge you a higher SVR and would have no hesitation in making margin calls if they suspected you might have negative equity.

Margin calls?

The terms of the last mortgage I knew inside out had no such provision... when the endowment policy flunked, and a big shortfall was expected, I was asked to increase my provision - but I declined because I had no obligation to repay for another 23 years - and it was still in a fixed interest rate period... so I couldn't be penalised.

I agree with you about the likely punishing SVR rate. I'd be interested to hear opinions about any other terms and conditions - say, for example, to have a current account with Northern Rock into which your salary must be paid? Are such conditions normal? How would they work if N/R were split up, I wonder?

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Margin calls?

The terms of the last mortgage I knew inside out had no such provision... when the endowment policy flunked, and a big shortfall was expected, I was asked to increase my provision - but I declined because I had no obligation to repay for another 23 years - and it was still in a fixed interest rate period... so I couldn't be penalised.

I agree with you about the likely punishing SVR rate. I'd be interested to hear opinions about any other terms and conditions - say, for example, to have a current account with Northern Rock into which your salary must be paid? Are such conditions normal? How would they work if N/R were split up, I wonder?

I imagine that like all contracts, you would have a notice sent of a period in which to deny your assent to new terms, after which it would be assumed you had agreed in the absence of a response. This is the norm, from your mortgage to your gas bill. Ever seen one of those "things are changing so we have to put prices up" leaflets from the gas company?

Well, that's an offer to change a contract. A mortgage takeover would also lead to a new set of terms and conditions being sent to you. The way it usually works is that they say "from x date, these conditions will apply". What is never made explicit is that you have the option to counter offer or just refuse. A third party can't take control of your commercial affairs without your consent.

Other important things to note are ultra vires, the fact that all mortgages are fraudulent and unprovable debts, that you only have to pay a debt to the value it's been purchased at and so forth. If a private company accepts 1p for your mortgage then that's its value and there is no reason for you to pay any more than that.

Not legal advice etc, just personal experience yadda yadda.

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  • 4 months later...
As in any bankruptcy, the liquidator will sell on the insolvent bank's assets for whatever it can get for them. As far as you're concerned the only thing that changes is the name of the payee on your monthly direct debit.

Of course, whoever has bought the insolvent bank's assets will want to maximise the return on their investment and will be a lot less concerned with customer service and customer relations than your bank might have been, particularly if it is a faceless private equity company. They means they would probably charge you a higher SVR and would have no hesitation in making margin calls if they suspected you might have negative equity.

Nobody can make a change to a contract during the period of the contract without your consent (or a court order - which is unlikely so long as you didn't cooerce the bank to lend you money). You do need to respond to any correspondence but this might be just to say "I have received your correspondence and I do not agree to the changes put forward. I will continue to meet the original contract terms ..." (eg. if you have a fixed rate for 5 years then that is what you will pay). The company cannot foreclose if you meet the terms of the contract (so long the contract does not make provision for any kind of foreclosure action to take account of negative equity etc.)

Just don't worry!

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Just musing here, but supposing it could be proved that there had been fraud in obtaining the mortgage, ie mortgagee had lied about income (whether the mortgagor was ignorant, or complicit with the fraud).

Presumably this would give the new mortgagor the right to foreclose the existing mortgage? Of course it may be still in their interest to keep mortgagees that are still making regular deposits on their books. However, might they want to improve their credit rating and winnow out the subprime stuff, maybe from people who'd missed the odd payment or taken a payment holiday - or maybe just as an asset-stripping exercise if the debt's been bought cheap, by say a PE company? In the latter instance you might be focusing all your attention on proving any type of discrepancy in order to foreclose, sell the property fast and cheap, while still turning a quick buck.

In these cases might there be a demand out of the blue to borrowers, for ongoing proof of ability to service the debt, ie send in current pay slips, statements, etc to corroborate this and weed out the crooked loans? I suspect in these instances, that the dodgy forms you can get over the internet would not stand up to the close scrutiny that was missing when the loan was first taken out!

Thinking this through, presumably this could happen anyway, without a bank going bust, but then the ultimate owners of the debt - in SIVs, etc, probably couldn't backtrack to establish who the actual borrowers were, and it wouldn't be in the originating bank's interest to rock the boat if they were in any way complicit in fraudulent activity.

TLM

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  • 2 weeks later...
What if a bank you have a mortgage with, goes bankrupt? If you are in the middle of a 10 year fixed rate mortgage, do you have to pay back the remainder of the loan to the bank immediately or lose your home? How does it work?

In a liquidation your mortgage will be sold on. For example a £100k mortgage might be sold at a discount of 20% for £80k.

The sheer number of mortgages would make the liquidator likely to bundle a package of 50 mortgages together. If the bank was in dire trouble because of the poor quality of its sub-prime mortgages, the discount might be 60%.

The interesting part would be whether you as an individual would be allowed to buy your individual mortgage at its discounted price. An analogy is the right to buy schemes for council house tenants.

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Just musing here, but supposing it could be proved that there had been fraud in obtaining the mortgage, ie mortgagee had lied about income (whether the mortgagor was ignorant, or complicit with the fraud).

Presumably this would give the new mortgagor the right to foreclose the existing mortgage? Of course it may be still in their interest to keep mortgagees that are still making regular deposits on their books. However, might they want to improve their credit rating and winnow out the subprime stuff, maybe from people who'd missed the odd payment or taken a payment holiday - or maybe just as an asset-stripping exercise if the debt's been bought cheap, by say a PE company? In the latter instance you might be focusing all your attention on proving any type of discrepancy in order to foreclose, sell the property fast and cheap, while still turning a quick buck.

In these cases might there be a demand out of the blue to borrowers, for ongoing proof of ability to service the debt, ie send in current pay slips, statements, etc to corroborate this and weed out the crooked loans? I suspect in these instances, that the dodgy forms you can get over the internet would not stand up to the close scrutiny that was missing when the loan was first taken out!

Thinking this through, presumably this could happen anyway, without a bank going bust, but then the ultimate owners of the debt - in SIVs, etc, probably couldn't backtrack to establish who the actual borrowers were, and it wouldn't be in the originating bank's interest to rock the boat if they were in any way complicit in fraudulent activity.

TLM

I dont suppose that there have been any rumblings about Misselling of mortgages by Northern Rock just before it went down. It wouldnt suprise me. What would be the repercussions if it was found that it did.

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