Mortgage escrow accounts have been in the news lately and seem
to be greatly misunderstood by many consumers. The original
idea behind mortgage escrow accounts was to protect
the interests of homeowners and they have been serving
that purpose for more than 50 years.
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 escrows on all FHA insured mortgages. This then
became the standard practice for all mortgages.
Mortgage
escrow accounts ensure that homeowners' property taxes,
fire and hazard insurance premiums, mortgage insurance
premiums and other escrow items are paid in a timely
fashion. They are a guarantee 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.
Escrowing
is governed by the Real Estate Settlement Procedures
Act of 1974 (RESPA), administered by the U.S.
Department of Housing and Urban Development (HUD).
Lenders must manage their escrow accounts in compliance
with this federal law and with the interpretations set
out by HUD.
In
addition, the 1990 Housing Bill recently signed into
law by the President, 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.
Escrowing
as practiced by the nation's lenders protects both the
borrower and the lender. Borrowers who have questions
or concerns about their escrow accounts should talk
to their lenders immediately. Consumers who know the
purpose of escrows and are aware of the benefits they
provide are the best insurance against misunderstandings
between borrowers and lenders or misleading information
from any source.
The
most obvious advantage of escrows 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 by up-to-date
insurance.
Because
of escrows, homeowners also do not need to worry about
calculating unexpected increases in their taxes or
insurance premiums. It is the responsibility of the
lender to allow for possible increases in these payments.
Even
when there are not enough funds in a mortgage escrow
account to meet increased tax or insurance payments,
the lender typically covers the bill without charging
interest to the borrower. 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 yet 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.
Escrows
protect the interests of investors in home mortgage
loans. By making home mortgages more attractive and
secure as investments, escrowing has led to a healthier
mortgage market. As a result, loans with better terms
and lower down payments are available to homebuyers.
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 collect from a few hundred lenders.
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.
When
the servicing of your loan 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.For more information,
contact the Mortgage Bankers Association of America,
Consumer Affairs Division, 1125 15th Street, N.W., Washington,
D.C. 20005
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