In recent years, homeowners have been vigilant about keeping their mortgage payments as low as possible by refinancing whenever interest rates drop enough to make a significant difference on their monthly tab. Even the most prudent homeowner, however, may not be scrutinizing the part of his mortgage cost–the escrow–that can easily total several hundred dollars each month.
Consumer experts say that if homeowners take a good look at their escrow account activity at least once a year, they may save money or at least guard against costly errors.
“Escrow” is a term used to describe an arrangement under which two parties agree that a transaction be made. The escrow attached to a mortgage is an arrangement whereby the homeowner agrees to pay his lender a certain amount each month. The lender then puts that money aside to pay property tax bills and premiums for homeowners insurance and, in some instances, flood or mortgage insurance.
You may first encounter the term “escrow” when you’re in the process of buying a home and putting earnest money down. That money is held “in escrow” and later applied to the purchase price.
When you pay your mortgage each month, the money that’s earmarked for escrow sits in an account until your lender disburses funds to pay tax or insurance bills.
Your mortgage lender collects the money monthly to pay these items rather than letting you pay the bills on your own because the lending company requires the security of knowing these items will actually be paid.
After all, until you hold your mortgage-burning party, the lender owns a portion of your home and he doesn’t want to see it go up in smoke without compensation from homeowners’ insurance, or see it confiscated by the county for delinquent taxes.
A few years ago, several large mortgage lenders were defendants in class-action suits that alleged they were holding too much money in escrows and insisted that they trim the homeowners’ mortgage bills.
The U.S. Department of Housing and Urban Development (HUD) has had requirements on the books since 1974 in its Real Estate Settlement Procedures Act (RESPA) that limit the escrow amount that can be held as a cushion to no more than one-sixth of the annual tax or insurance bill. Those requirements were clarified in 1994.
Under them, each mortgage holder should receive an annual statement showing a month-by-month escrow balance. The lowest balance shouldn’t be less than roughly one-sixth of the total annual bills, said David Ginsburg, president of Loantech, a Gaithersburg, Md., firm that audits escrows.
An easy way to determine whether you’re paying the right amount is to look at your current mortgage bill, find the amount you pay in escrow (it should be broken out, separate from principal and interest) and double it, suggests Rebecca Holtz, director of the RESPA-ILS division at HUD. That sum should roughly equal one-sixth of your annual property tax and insurance bills.
If you find you’re paying too much, call your lender to rectify the situation, says George Wessel, senior vice president of loan servicing for PNC Mortgage Corp. of America in Vernon Hills.
If you’re not happy with a lender’s response, HUD suggests you visit its Web site at www.hud.gov:80/fha/sfh/res/respa–hm.html.
That site lists the details on how lenders are legally bound to respond to your complaint. Specifically, consumers who make a written complaint to their lender–a request that has to be separate from a mortgage payment–must receive an acknowledgement of their complaint within 20 business days, and some type of resolution within 60 business days.
HUD has been receiving more complaints concerning escrow accounts in recent months, says Holtz. “We don’t know the reasons for the increase in the complaints,” he said, “but we speculate it may be because our Web site is alerting more consumers to escrow issues.”
Mistakes can happen in several ways: a lender may be keeping too much of a cushion, paying bills late, or in the worst case scenario, neglecting to pay bills at all.
If a lender is late, “it is the lender’s responsibility to make sure a customer is never penalized,” says Wessel. Adds Holtz, “As long as the borrower is timely, the lender shouldn’t pass on a late fee.”
“The worst mistake I’ve heard of,” relates Ginsburg, “came from a woman who took an extended vacation. When she returned home, a friend called to say her home was listed in the paper as being tax delinquent and was scheduled for sale in an auction.”
If a lender makes an error, he’s not doing it intentionally or maliciously, says Ginsburg. It’s in the lender’s interest, he underscores, to pay these items, because the property serves as the lender’s collateral. A lender doesn’t want it sold at a tax sale any more than the homeowner does.
However, loans are frequently sold from investor to investor, and loan firms often merge, Ginsburg notes: “Obviously, the more hands that touch the data files, the more chance that there will be some kind of mistake.”
The wave of homeowners refinancing their mortgages probably also contributes to glitches with escrow accounts, says Wessel.
When a lender has to make a quick transfer of loan information, or transfer information right when a tax bill is due, things may simply fall through the cracks. Or, more correctly in this computerized era, data bits may be jumbled.
Especially if you have refinanced or if your mortgage servicing has changed, it’s prudent to check with your insurance company and county assessor to check to see that bills are paid.
If you do receive a delinquent notice on your property taxes, take it seriously, but don’t go into apoplexy, counsels Wessel:
“The mortgage companies are going to be paying 10 days before the deadline. But in some cases, the taxing authority may spend a month or two to finally apply all the payments. So in their records they may indicate the homeowner is delinquent when in fact the funds are sitting there waiting to be applied.”
Still, call the assessor’s office and make sure the lender is receiving a copy of the delinquent notice. Also call the lender to alert him of the problem, says Wessel.
“We are in the business of helping people help themselves,” says Holtz of HUD. In some rare instances, however, HUD may intervene on a homeowner’s behalf.
“If someone is not getting a response after the second qualified complaint, they should send us a letter,” Holtz says.
Time-pressed consumers or homeowners who are confused reading their mortgage statements can also turn to professionals for an escrow “audit.”
At least two firms will, for a fee, check to see whether a lender has been withholding too much in escrow, or whether he’s been paying the proper amount in interest each month on the account.
State law determines whether a lender is required to pay interest. In Illinois, no interest is required on escrow funds, reports Stanley Stewart, assistant general counsel in the state Office of the Commissioner of Banks and Real Estate.
Mortgage Monitor Financial Services in Stamford, Conn. (203-973-0288) will audit a fixed-rate loan for $219 and an adjustable loan for $269. For those fees, homeowners receive an escrow analysis as well as verification that they are being charged the correct interest rate on their loan.
“With an adjustable rate loan, a lender may be using the wrong index or date to make adjustments,” explains Terrell Kelley of Mortgage Monitor.
Loantech of Gaithersburg, Md., (800-888-6781) charges $129 for an escrow audit and $129 for a separate interest rate audit.
