There's a dandy one going around best illustrated by what followed this question:
I was informed a month or so ago that my mortgage (30 year fixed) was sold to Citigroup. Any idea what this means for me? I can only imagine that it is not good.
A helpful but mistaken reply:
It's unsettling to have your personal loan vanish into the virtual world of equity-backed securities. But Citigroup, or whoever they sold your mortgage to, cannot unilaterally change the terms of your legally binding loan contract. As long as you make your payments on time, nothing changes for you.
Better have a close look at your mortgage contract. This is usually not the case.
The question came up a year ago elsewhere... after we had luckily been able to pay off a mortgage. I called my lending institution's vice president, who is a friend of the family, to ask him about the issue. Line by line, he went through the standard contract used in the industry with me...
He says that particularly in the case of home equity lines, there is a provision in documents (each lender’s documents are somewhat different) by which a lender may declare themselves undersecured. Insecurity provision falls under default provisions - a simple sentence says "lender in good faith deems itself insecure" which can result from decline in real estate values in contrast with mortgage values. This is the point at which a lender would consider foreclosure when property values have fallen beneath mortgage values. He confirms that nearly all lenders’ documents bear a provision like this.
There is an adverse change clause, usually in a mortgage, which says when a material adverse change occurs in grantor’s financial condition or lender believes the prospect of payment or performance of the indebtedness is impaired, the lender may foreclose. This means, for instance, the event of a declining real estate market in combination with losing your job - even if by some other means you keep paying on your mortgage.
Other default provisions include death of borrower whereby a surviving spouse could lose the mortgage. Also there is failure to comply with any other term, obligation, covenant or condition contained in the mortgage, the note, or any of the related documents.
He cited this: commencement of foreclosure or forfeiture proceedings whether by judicial proceeding, self-help (such as a creditor repossessing a vehicle without court order), repossession or any other method, by any creditor of grantor or by any governmental agency against any of the property (includes furniture, autos, etc.). Which means, also, if the government gets involved (hmmm, like they ever would do that against certain citizens...).
His bank repossessed a vehicle where the payment was fully current on the loan. The borrower had pledged that vehicle as collateral, and the whereabouts of the title was in question. So because of a competing claim, the bank repossessed the vehicle.
In the event that payments are made, he said, usually the bank will support the mortgage. However should a significant portion of the grantor’s economy crumble - such as loss of a significant employment sector and hence grantor’s job - the bank is likely to take action regardless of payment history if property value has fallen below the mortgage value.
Sum of it all: if the US economy cracks up big time, this can be reason enough for the lender to doubt the mortgage.
Perhaps you have some different and unique contract... but be advised. If you're thinking you're all set with a fixed mortgage, you should have a very close look at your contract concerning these provisions.