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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?
The law is very specific in setting limits on the
amount that the lender may collect. The lender may require a monthly
payment of 1/12 of the total amount of estimated taxes, insurance premiums
and other charges reasonably anticipated to be paid. Plus, the lender may
collect an additional balance of not more than 1/6 of the estimated annual
payments. If the lender determines there will be or is a deficiency in the
escrow accounts, the law permits the lender to require additional monthly
deposits to avoid or eliminate the deficiency.
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.
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