by Gaurav Bhola, MSM, Managing Editor
Thursday, August 9, 2007

The subprime mortgage market has been hit hard in the last few months due to high home loan defaults. In the boom real estate market mortgage lenders had been doling out mortgages to many unqualified borrowers and now it is coming back full circle. American Home Mortgage Investment Corp., the tenth largest mortgage lender in the U.S. finally succumbed to financial pressures caused by defaulting subprime mortgages and filed for Chapter 11 U.S. bankruptcy protection from creditors. Its creditors had stopped all financing to the corporation, thus was forced to stop making new home loans. Over 6000 employees have lost their jobs and its shareholders hold worthless stock certificates.

Due to the increasing pressures from the housing market, rising home loan defaults, and tightening lending practices, banks no longer want to buy risky mortgage loans from mortgage lenders. Mortgage lenders package their home loan mortgages and sell them to Wall Street banks, Fannie Mae, or Freddie Mac; who in turn repackage the mortgage loan bundles and sell them on the secondary securities market as mortgage-backed bonds.

Many mortgage lenders were not able to sell their packaged home loans, which is one of the reasons companies like American Home Mortgage, New Century Financial, ResAME Mortgage, Mortgage Lenders Network, and Onwit Mortgage Solutions went out of business this year.

But the question weighing on the minds of borrowers who received their home loans from these and many more financially unstable lenders is: What happens to their home loan mortgages?

During bankruptcy proceedings the affect on consumers is unnoticeable. The proceeding mostly affects creditors, who would like to salvage some of their investment. This usually means that the mortgage lenders’ book of mortgages will be sold at a steep discount to another bank or company willing to take the risk.

At that stage the borrower will receive a letter stating that their mortgage is now being held by a different company. So the borrower will simply have to make the check out to a different company. Just because your mortgage broker and lender are going out of business doesn’t mean you get a free pass and no longer owe the mortgage.

You don’t want to stop paying your mortgage during the lenders bankruptcy proceedings, it might lead to foreclosure. It is estimated that by the year’s end there could be two million foreclosures; so far there have been 925,986 foreclosure filings.

But you will have to be patient during the bankruptcy transition period. Your check may go to a defunct address or it may get put into their computer system late. So it is advisable to call and check if the payment was received by them, be proactive. It is better to anticipate and be able to navigate any logistical issue that may come up for the lender that can affect you directly.