As an increasing number of mortgage lenders across the country file for bankruptcy, homeowners who assume that their property tax and insurance premiums are being paid could find themselves in a great deal of trouble. Because of logistical problems that occur as loan servicing is taken over by other companies, property tax and insurance payments may be lost or deemed late, leaving borrowers vulnerable to tax penalties, foreclosures and lapses in insurance coverage. Homeowners should take heed and keep a close eye on their mortgage payments to make sure that their property taxes and insurance premiums are being received on time by the appropriate institutions.
More than 50 mortgage lenders have filed for bankruptcy this year, according to a report posted by the Associated Press last month. Many of these lenders catered to subprime borrowing and adjustable rate mortgages. A recent surge of borrowers defaulting on these loans has deterred banks and other investors from buying out bundled mortgages from these lenders, driving many institutions into bankruptcy.
Although bankruptcy is bad news for the lender, most consumers will not experience any drastic changes. A lender that goes out of business typically sells its assets at a discounted price to another financial institution under bankruptcy court supervision; if the company that services the loan also changes, the borrower is notified. The amount of the mortgage payment and the obligation to pay on time doesn’t change.
However, borrowers can become victims of costly mistakes if they aren’t careful.
Thousands of homeowners are at risk of losing their homes because of problems with loan servicing arrangements for American Home Mortgage Investment Corporation, a lender that went bankrupt last August, according to an article published in The Wall Street Journal.
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Freddie Mac, a government-chartered housing financier, said 4,547 loans valued at nearly $797 million are at stake. It has requested a court order to seize American Home’s loan files, which are necessary to pay insurance premiums and property taxes on American Home’s loans.
In the meantime, borrowers are at risk of being deemed late because of a delay in paperwork required for loan servicing; insurance policies are at risk of lapsing due to nonpayment; and borrowers are at risk of facing tax liabilities and tax foreclosure sales due to unpaid property taxes.
In light of the issues faced by bankrupt lenders and the consumers who borrowed from them, it is a good idea for homeowners to exercise vigilance and respond as soon as a problem with their property tax or insurance payments is found. Although loan servicing companies are hired to pay out property taxes and insurance, the borrower is ultimately responsible for making sure the payments are being received by the appropriate institutions.
“My advice would be to be very proactive,” Stephen DeLaney, an analyst at JMP Securities in Atlanta, said in a recent BusinessWeek report.
Borrowers who are concerned that payments are being wrongly deemed late may want to send their payments via certified mail-return receipt requested. This shipping method provides documented proof that the mailing was sent and received, and also notifies the borrower as to exactly when the mailing was received—crucial pieces of information in arguing a late payment.
If a payment doesn’t show up on a borrower’s transaction record, the borrower should immediately contact the new loan servicer, followed by the previous lender. If neither lender is able to resolve the problem, the homeowner should contact their insurance company directly to ensure their insurance doesn’t lapse. The borrower should also contact his or her local county official regarding the property taxes that aren’t getting paid.
Finally, borrowers should inform the consumer affairs department of their state banking institution or attorney general’s office about delinquent companies that are receiving payments but are not paying property tax and insurance bills as they are legally obligated.