How Do Lenders Go Bankrupt?
A lender can go belly-up if its liabilities outweigh its assets. This happens if a lender makes too many bad loans or if there is a sudden decrease in the value of its assets (for example, if there is a sharp decline in the value of the properties on which they hold the mortgage). Although a lender going into bankruptcy is incredibly rare in Australia, it is not impossible. Australian financial institutions have seen the biggest cases of bankruptcies through the Queensland Permanent Building Society collapse in 1977 and the Global Financial Crisis in 2008. However, even in these extreme circumstances, the borrowers were not severely harmed, owing to things like takeovers, the US Federal Reserve, or the Australian Government stepping in to prevent banks from going bust.
Do You Still Have To Make Repayments If Your Lender Goes Bankrupt?
When most people think about the possibility of their mortgage lender going bankrupt, they believe either that they will be exempt from having to repay the money they owe or that their home will immediately be at risk. The truth is somewhere in the middle. When your mortgage lender goes bankrupt, they can no longer operate as a business. This doesn’t mean that you are exempt from having to repay your mortgage, but what it does mean is that the lender may have trouble collecting the money you owe them and may be looking at ways to pass on your mortgage to a new lender. If you are worried about your mortgage lender going bankrupt, the best thing you can do is to stay current on your payments. This will help you avoid any problems with your credit score or having anyone foreclose on your home. Keeping an eye on the news for any updates about your lender’s financial situation is also a good idea.
Stages And Signs Of Bankruptcy
A lender goes through two main stages before officially going bankrupt.
1. Stagnant Phase: Increasing Interest Rates And Encouraging Refinancing
The first stage is when the lender’s economic activities become stagnant, so they start increasing their interest rates to bring in more revenue and stay afloat a bit longer. They also increase their rates to encourage customers to refinance with another lender.
The problem with this stage is that, as the interest rates increase, fewer and fewer people can afford their home loan payments. This leads to an increase in defaults and foreclosures,
further weakening the lender’s financial position. This stagnant phase is often a warning sign for borrowers.
Several other signs show a lender may be heading toward bankruptcy. These include:
- The lender starting to foreclose on more properties
- The lender having trouble meeting its financial obligations
- There is talk of a takeover or merger with another financial institution
- The lender selling off assets
- The lender missing its liability payments
- The lender having trouble issuing new loans
If you notice any of these signs, stay current on your home loan payments – which is always the best thing to do anyway – and keep an eye on the news for updates about your lender’s financial situation.
Case Study: GE Money, a foreign lender, withdrew from the Australian market in 2008 due to its stagnation in the market. Customers who paid a higher interest rate and were up to date on their repayments were encouraged to stay with the company, while customers who were missing repayments were encouraged to take actions such as refinancing, selling their property, or entering into a payment arrangement. GE pushed its customers to refinance with other banks so it could use the funds overseas for other purposes. Pepper Money, one Australia’s leading specialist lenders, took over the management of the remaining home loans.
2. Filing For Bankruptcy Stage: Selling off Mortgages Or Going Through An Acquisition
The second stage is when the lender files for bankruptcy. This is a legal process that allows the lender to either sell off its assets (for example, its mortgage loans) or go through an acquisition by another financial institution. Whether the lender chooses to sell off its assets to another lender or is acquired by another financial institution, nothing changes for the borrower’s repayment obligations. The only major changes are the account details and services. The new owners of the mortgage might not be as lenient when it comes to repayment options and might not offer the same customer service. They might be but there is no promise of that. There is also a chance that the new lender will not honour the terms of the old mortgage, so it’s important to be aware of this possibility.
Case Study: Rams, a non-bank lender, was listed on the Australian Stock Exchange just before the Global Financial Crisis and then was unable to secure funding in 2007. Seeing no option of running as an independent lender, its existing home loans were renamed RHG mortgages and the RAMS brand was sold to Westpac. Customers of RHG paid higher rates and many of them chose to refinance.
What If Your Home Loan Is Sold To A Bad Lender?
When a new lender acquires your mortgage, they must notify you within 30 days of the effective date of transfer, the Consumer Financial Protection Bureau states. So, even though you don’t control who gets your mortgage if your lender goes under, you will always get the chance, up front, to refinance. If you are up to date on your repayments, have a stable income, and are a low-risk borrower, you probably will have no trouble refinancing. You may, in fact, qualify for better interest-rate deals and home loan packages in general. You may choose to take the opportunity to shop around and compare rates from different lenders.
When Does Your Lender’s Bankruptcy Become Your Problem?
Your lender’s bankruptcy becomes your problem when you are not a standard type of borrower with a straightforward home loan. The following types of borrowers are at high risk:
- Low-doc borrowers
- People with a bad credit history
- People missing their repayments
- Foreign investors living outside of Australia
The above types of borrowers are considered high risk So, the new lender may force them into refinancing and they may have difficulty finding a lender who will approve a new loan for them.
Also, if you stop making repayments on your home loan, the new lender could foreclose on your property as usual. This means you would lose your home and all of the equity you’ve built.
Bank Vs Non-Bank Lender: Which Is Safer?
Although it is easier for a non-bank lender to go bankrupt than a bank — as they have less government regulation and are more likely to take on high-risk borrowers– both types of lenders are subject to the same business risks and can go bankrupt for the same reasons. In Australia, it is relatively unlikely that any lender will go bankrupt. The non-bank lenders may not be subject to all the same government regulations as the banks but they are still heavily regulated by the Australian Securities and Investments Commission (ASIC), as directed by the National Consumer Credit Protection Act and Australian consumer law. In addition, like any other bank, all legitimate lenders need to obtain an Australian Credit Licence (ACL) from ASIC or an Australian Financial Services licence to qualify as a mortgage lender. So, when it comes to safety, there is not much difference between banks and non-bank lenders.
Looking to Refinance From Your Troubled Lender?
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