The banking industry has been going through a rough transition period. Hundreds of banks have failed due to the poor economy and unfit management. There are a number of ways that a bank can fail including fraudulent loans, unequal capital and the inability to pay its creditors. However, when a consumer has a mortgage through a failed bank they may be incredibly confused on how they are supposed to pay their mortgage. 

The first thing you need to understand is that before a bank fails , the Federal Deposit Insurance Corporation (FDIC) steps in to make sure that when it is announced that there are clear guideliens in place for depositors, borrowers and employees.

Here is what they do:

One of the FDIC’s primary goals is to return loans and other assets to the private sector as quickly and efficiently as possible. To accomplish this, the FDIC employs several strategies to dispose of loans:

◦Prior to a bank’s failure, the FDIC offers some or all of the failing bank’s assets for sale to healthy financial institutions upon the bank’s closing.
◦Loans not sold in the initial sale are packaged and offered for sale to the broader financial market, typically within a few months of the bank’s failure.
◦Until the FDIC sells your loan, it undertakes the associated servicing responsibilities.

So, when a failure is immenint, the FDIC has been at work in the back ground to make for a somewhat smooth transition to denote another bank to purchase its assets. Very rarely is the FDIC unable to find a bank unwilling to purchase the assets of another. Once the banks assets have been purchased, typically the same day that the bank fails, the new bank will take over all the functions of the old bank. Little may change in the day to day operations of the bank. Branch locations, ATM locations and other information typically stays the same for months or even years after the new bank has taken over the old bank. 

From the FDIC:

When a bank fails, the FDIC sends written notice with payment instructions and points-of-contact to the borrowers whose loans it acquires.Because the FDIC is not a bank, you are strongly encouraged to seek a new lender that will refinance your loan and serve as a replacement source of funding. In some instances, the FDIC may offer borrowers an incentive to refinance by offsetting some or all of the associated closing costs.

Mortgage holders in a failed bank should continue to pay their mortgage the same way as they always have. Should the bank decide that they would like to change where the mortgage payments are sent or how the online bill pay should be sent they will contact the mortgage holder through a letter. It is important to check for letters from the bank that holds your mortgage as it is their primary method of contacting you. Individuals who have questions about their failed bank can call the FDIC at the specific number listed for their failed bank on the FDIC bank failure website.

Having the bank that holds your mortgage fail can seem like a scary experience. However, all banks that are covered by the FDIC are monitored and assisted very closely. When a FDIC bank fails a receiver bank is determined and your mortgage is still paid as it always has been. There is no change of payment address until the new bank that took over the failed bank tells you.

Moe Bedard
My name is Maurice "Moe" Bedard. I am the founder of America's #1 Mortgage Forum, My online work has been featured in the New York Times, LA Times, Fox Business, and many other media publications.