Misconceptions

• When a bank is taken over by the government, nothing really changes for the mortgage borrower. While some mistakenly believe that a government takeover of a bank frees them from their mortgage debt, nothing could be further from the truth. The government takes the mortgage from the bank and holds on to it until a buyer is found. Individuals who owe on mortgages are advised to continue making payments just as before until they are contacted by a new lending institution for further instructions.
  
  

Function

• A bank gets taken over by the Federal Deposit Insurance Corporation if it is determined (usually through bank audits and government stress tests) that a bank is not financially stable enough to meet all of its obligations. The FDIC steps in, and using money that comes from a reserve fund (and from taxpayers), shores up the bank.
  
  

Time Frame

• Once the FDIC has taken over a bank, it starts shopping around for a buyer for the various outstanding loans. It might seem odd that someone would actually want to buy loans that weren't producing the necessary cash flow for the original bank, but the fact is that in the long term picture, those loans will be profitable. For a bank with solid financial footing, buying mortgage loans is a sound financial investment.
  
  

Considerations

• Between the time that the FDIC takes over the loan and the time that it is able to sell it, the individual will usually receive instructions on how to proceed. In some cases, the FDIC is able to sell the bank almost immediately and in some cases it takes longer. During the turnover period, the borrower is often given a grace period. During the grace period, he might not have to make the mortgage payments until a new lender comes is found. When the new lender takes over the loan, payments must be made at that time. There will not be any penalties for mortgage payments not made during the grace period.
  
  

Benefits

• There can be benefits to having the FDIC take over a failing bank and selling a mortgage to another lender. In some cases, the new lender might offer the borrower a chance to modify the loan. In most cases, the only time the new lender wants to modify the loan is to make the conditions more favorable to the lender, but it is possible that they might allow an early payment of the loan without penalties, which can save money in the long run.