by M. Anthony Carr
Question: My escrow is analyzed every year. The second year of purchase my lender dropped my payment approximately $30. This year, my third year into the loan, the lender sent me a letter advising me they had made an error and raised my payment $230 per month. What are the rules governing escrow management?
Deborah R.
Answer: It's unusual for a mortgage service provider to “miscalculate” the amount needed each month for escrows. It is not unusual, however, for escrows to fluctuate throughout the life of the loan.
Escrows are the funds paid each month by a borrower to cover the lump sum payments due throughout the year for taxes and hazard insurance. To protect its secured loan, a lender would obviously want to be assured that the taxes are paid when they are due. If not, the house could be sold out from underneath the homeowner to pay taxes and the lender would be put at risk of losing the collateral for the loan he has provided the homeowner.
Some critics of this system point out that the lenders are also gaining quite a bit of interest money from the funds that are held in escrow throughout the year. Since lenders are not required to pay the borrower any interest earned on the money, they can hold the funds in interest-bearing accounts -- obviously making a skim on the side … but that's another story.
For your escrow payments to jump so much in one year, it appears the lender is having to do two things at once -- make up for the insufficient funds he didn't collect last year, and more than likely, jack up the amount to cover the increase in taxes and insurance for this next year.
If you believe the lender is mishandling your escrow funds or collections, you can file a complaint to a couple of groups.
The Real Estate Settlement Procedures Act (RESPA) is the legislation that regulates the collection and handling of escrow funds. The enforcement of this law falls under the U.S. Department of Housing and Urban Development. Go to the site, search for RESPA and you'll find all you need to file a complaint there.
The Mortgage Bankers Association of America launched a self-policing arm several years ago. More information on that agency can be found at www.StopMortgageFraud.com.
Keep in mind that even though you file a complaint, the wheels of justice (as well as investigations and enforcement) roll along very slowly. When it comes to your mortgage payments, keep making them, even though you may disagree with what's happening on the lender's end. The wheels of foreclosure and courthouse steps sales, move at a much quicker clip.
As far as your escrow payments fluctuating -- this is normal. The No. 1 reason for increasing or decreasing escrow amounts is your local taxes. When homeowners are ecstatic about appreciating home values, they tend to forget that they're going to get bit on the backend. If the fair market value goes up, so does the tax assessment. If your local jurisdiction doesn't adjust its tax rate, then your bill is about to jump.
That's what happened to me in this month's mortgage payment. My taxes have increased by upwards of $122 per month. (Thank you, Fairfax County Board of Supervisors.)
It's a hard pill to swallow and it is a surprise to many new homeowners who purchased a house, in part, to get away from rent increases. A side benefit is that the tax increases are 100 percent tax deductible on my federal return.
Published: September 12, 2003
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