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Thursday, federal regulators seized mortgage lender Washington Mutual.   The Seattle-based thrift became the third “big name” lender to close its doors since July, joining IndyMac and Lehman Brothers.

In 2007, these 3 lenders represented about 10 percent of the mortgage market and their subsequent failures are confusing American homeowners.

The most prevalent question:

If my mortgage lender fails, are my payments still due?

And the answer is an unequivocal “yes”. If a mortgage lender is seized, goes bankrupt, or is otherwise closed, it doesn’t change the terms of the bank’s mortgages whatsoever — just maybe the mailing address.

This is because a mortgage (and its corresponding note) is a legal contract between the lender and the lendee, signed on the date of closing. It is binding and cannot be altered by either party.  The only way to “end” the contract is to pay the loan in full. 

This can happen in one of 3 ways:

1. The home is sold and the mortgage is repaid
2. The home is refinanced and the mortgage is repaid
3. The home loan is paid down to $0 balance by the homeowners

So, if a mortgage company fails, its doesn’t cause the loan to be paid-off and, therefore, the mortgage contracts is still valid.  Payments are still due. 

However, because its mortgages are an asset, the failed lender will usually transfer them to a new lender’s servicing department.  This means that homeowners will write the same check for the same mortgage but to a different company.

To reduce confusion around transactions like this, the government puts two safeguards in place.  First, it requires the former lender to send a 15-day advance notice of the change to the homeowner.  And second, it requires the new lender to do the same.

In situations like this, the onus is ultimately on the homeowner to open and read his mail, and make changes accordingly.  It’s especially important for people who pay their bills online as opposed by paying them manually; you likely won’t get notified if you’re sending payments to the wrong place.