INTRODUCTION

Mortgage escrow accounts have been in the news lately and seem to be greatly misunderstood by many consumers. The original idea behind the escrow account was to protect the interests of homeowners and they have been serving that purpose for more than 50 years.

THE HISTORY OF ESCROWS

Mortgage escrow accounts came into being more than 50 years ago. In the 1930's, many Americans were losing their homes in foreclosures because of late tax payments. To help ease the burden on homeowners who had to come up with large, lump sum payments at tax time, lenders agreed to take on the responsibility by collecting smaller monthly sums from homeowners along with their mortgage payment. In 1934, the government mandated that lenders manage escrow accounts on all FHA insured mortgages. This then became the standard practice for all mortgages.

Mortgage escrow accounts ensure that homeowners' property taxes, fire insurance premiums, hazard insurance premiums, mortgage insurance premiums and other escrow items are paid in a timely fashion. The escrow account guarantees that there is always enough money to pay these bills when they are due so that the homeowner avoids the risk of lapsed insurance coverage or delinquent taxes.

Escrow accounts are governed by the Real Estate Settlement Procedures Act of 1974 (RESPA), administered by the U.S. Department of Housing and Urban Development (HUD). All lenders must manage their escrow accounts in compliance with this federal law and with the interpretations set by HUD.

In addition, the 1990 Housing Bill requires lenders to issue itemized statements of escrow accounts to borrowers on an annual basis. While many lenders are already providing homeowners with regular statements of their escrow accounts, the new law should ensure that every lender follows this practice.

THE BENEFITS OF MORTGAGE ESCROWS

Guarantee that bills are paid on time. The most obvious advantage of escrow accounts is that they automatically budget the borrower's tax and insurance responsibilities over the course of a year. Homeowners do not have to worry about coming up with several large, lump sum payments, each with different due dates, throughout the year. If there is ever a fire in the home, or if the basement floods causing damage, the homeowner is assured that the home is protected with "current" insurance.

Mortgage escrow accounts provide homeowners the ability to pay large increase in negotiated payments after they are due. It is very common for lenders to pay taxes and insurance premiums when they are due even though all the money for these bills has not been collected from the homeowner. It is estimated that in 1989 alone, lenders advanced more than $600 million to homeowners who then avoided the penalties and risks of not paying their taxes and insurance on time.

Mortgages have lower rates and down payments because of escrow accounts. Escrow accounts protect the interests of investors in home mortgage loans. By making home mortgages more attractive and secure as investments, escrow accounts have led to a healthier mortgage market. As a result, loans with better terms and lower down payments are available to home buyers.

Local governments save money. Escrow accounts also benefit local governments by providing a more efficient, less expensive means of tax collection. Rather than working with millions of homeowners, municipalities need only to collect from a few hundred lenders.

HOW DOES THE LENDER COME UP WITH MY PAYMENT?

WHAT HAPPENS WHEN MY LOAN IS TRANSFERRED?

When the servicing of your loan is transferred to another lender, the new lender takes on the responsibility of managing your escrow account. At that time, the new lender may examine your escrow account to make sure that the funds being collected are sufficient to cover all payments that are to be made. If the new lender feels that the amount collected must be adjusted, you will be notified of the change in your monthly payment.