It's no secret that Home Capital Group's (HCG) stock has gone down the laundry chute.
In the past six months, it's fallen from $22 to $6 - a 73% implosion - and when stocks plunge that fast, it's often the beginning of the end.
However, the recent announcement that HCG sold $1.5B in mortgages to an unnamed buyer and secured a $2B emergency line of credit has allowed the stock to regain a bit of its footing. But, despite this small increase, these actions only further confirm what the market already knows - financial trouble continues to brew.
Now, HCG borrowers are looking for an answer to a very important question: What happens to my mortgage if it gets sold?
Well, it shouldn't have any effect -- on one condition.
Most people understand when they take out mortgages, they're signing a legally binding contract and both parties are expected to carry out their part of that contract. What many don't understand, however, is that these contracts are often bought and sold on a secondary market.
As scary as this may sound to homeowners who were unaware, it's actually a common practice.
Your credit card accounts, car loans, and student loans are all likely to get bought and sold by other issuers, usually for liquidity reasons. By selling to other companies, or outside investors, these lending agencies are able to keep a large pool of cash ready for new loans.
Without this secondary market, mortgage lenders may have to wait 10 or even 20 years before significant amounts of capital is returned to them -- and nobody has time for that.
However, although this is common practice, it's not common knowledge. So, when homeowners receive a notice that their mortgage has been sold, it sends a wave of panic through them. Many think that since somebody new is in charge, there's going to be some structural changes to their mortgage - including a pair of hydraulic jacks installed under the interest rates. This could not be further from the truth.
A contract is a contract, and once the deal is signed, the terms don't change - even if the loan is sold. You may have to log into a different web site, or write the cheque to a different company, but that's just semantics. It's still the original contract, and that's set in ink.
So, what's the one condition?
Most subprime mortgages are short-term loans to help borrowers through rough times, and these contracts must be renewed every so often - usually every one, two, three, or five years.
If your mortgage gets sold, the new lender will honor those terms -- provided you've kept up with the payments according to the original agreement. If not, there's a good chance it'll get rejected, and you'll need to find new financing -- and that could mean higher rates.
Of course, refusing to renew the contract could have also happened with the original lender. Any time you're behind on payments, don't expect the contracts to be renewed -- at least under the same terms.
So, to be clear, the real risk isn't that your loan gets sold, it's that you fall behind on your payments.
If your loan is sold, you should receive a notice within 30 days of the sale letting you know the name, address, and phone number of the new mortgage holder, where to send payments, and the effective date of the transfer.
What are the chances of this happening? Pretty high. The future for HCG isn't looking too bright these days. They recently dropped the maximum amount for mortgages to $600,000 and the maximum credit line limit to $50,000. These amounts are far too low drastically limiting its potential client base.
Still, if HCG does go under, it's a good idea to keep in touch to make sure there are no mix-ups with notices getting lost in the mail, as you are still liable if your payments are not sent to the right person. However, on the bright side, any payments sent to HCG up to 60 days following the sale will automatically get forwarded to the new lender.
So, if you are a HCG borrower, there is no need to panic. Plunging stock prices are a scary thing - but they mainly only impact those invested in that company. Fortunately, for homebuyers, your mortgage is a contract, and you've got all the original rights contained within the four corners of that contract -- regardless of who's holding it.
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