During the current housing crisis, many homeowners are steering away from foreclosure and searching for other options, such as loan modifications and various other repayment plans. After a grueling amount of work, endless phone calls, and piles of paperwork, many homeowners find that their “modified” payments are actually higher than what would have been their default payment. The reason for this is that the new payment now includes their escrow amount, which is added to the principle and interest portion of the mortgage payment. Unfortunately, the escrow amount will oftentimes include past due payments, future projected property taxes, insurance, and other related fees. The reason for this is to ensure that the homeowner’s mortgage, taxes, and insurance are paid on time.
Escrow arrangements can lead to vulnerability of interests of both parties even though the goal of such is to protect the interest of the homeowner and the lender. In an escrow arrangement situation, a lender might feel the need to expend funds to protect collateral if the homeowner is unable to make the correct payments in a timely manner. Furthermore, the homeowner will often not possess the control or knowledge regarding how that escrow amount has been calculated. As a result, a lender possesses the ability to require that the homeowner pay an excessive amount so that tact and insurance obligations are covered. Sadly, a lender with many customers has the capability of gaining profits from small overcharges on escrow accounts.
Fortunately, Congress enacted the Real Estate Settlement Procedures Act (RESPA) to manage the procedures of mortgage escrow accounts. After a homeowner has defaulted on their loan, RESPA sanctions a loan servicer who will estimate the property taxes and insurance that will accumulate over the following year. The loan servicer will adjust the borrower’s monthly escrow payments below the mortgage which will cover those estimated expenses, subject to limitations. In addition, Section 10 of RESPA limits the amount a lender, or servicer, might require of a homeowner to preserve in his/her account to cover the expenses. Section 10 manages a lender’s obligations with respect to providing an annual escrow account statement and notification of any deficiency in the escrow account.
Section 10 also states that a lender is permitted to charge the borrower a monthly sum that is equal to a twelfth of the total annual escrow payments that the lender anticipates paying from the account. Additionally, the lender is allowed to add an amount to sustain a cushion equal to a sixth of the estimated total amount of annual payments from the escrow account. Although lenders are prohibited from collecting greater than a two-month cushion on the escrow amount, they are permitted to collect monthly escrow payments that exceed the amounts necessary to pay the tax and insurance premium as they become due.
RESPA’s implementing regulation, Regulation X, ensures that the correct funds are being placed in escrow. It allows a servicer to conduct an analysis of the amount of money that will become due into the escrow account at the start of the loan, at the conclusion of each computation year, or “at other times during the escrow computation year.” Moreover, Regulation X sanctions a lender to require that a borrower pay additional deposits if a deficit exists in the escrow account. However, if a lender does determine that a deficiency amount exists, the lender is permitted to require that the homeowner make additional deposits into the escrow account to fix the deficiency error. A deficiency is the negative balance in an escrow account. On the other, a shortage is the amount that an escrow account balance falls short of the target balance during the time of analysis. RESPA does allow for lenders to calculate and collect certain “advance deposits in escrow account,” or shortage contributions, so that any negative balance in a borrower’s escrow account over the applicable 12 months will be minimized.
The two calculations used to determine whether an account has been correctly escrowed are:
The aggregate method, the first method, estimated requirements for predicted payments for the following twelve months are added and the balance of the escrow account is subtracted. The product of this is then divided by twelve which determines the monthly escrow requirements for that the following twelve months. Therefore, all escrow obligations are combined to determine the required monthly escrow payment from the mortgagor, regardless of whether or not the individual escrow items are disproportionate in the amount and become due on different dates. On the other hand, the second method, which is referred to as individual item analysis, is when the lender creates sub-accounts within the escrow account that corresponds to each expense that must be paid. The lender then calculates the escrow amount needed to make sure that each sub-account never decreases below zero.
Although these laws have been created to avoid over-escrowing circumstances, it is imperative for homeowners to closely review the escrow requirements within their mortgage as well as monitor escrow accounts. A violation to the law has the ability to increase a homeowner’s monthly payment to the point where he/she is forced in a foreclosure. Of course, if a lender violates the laws, it could be held liable for breach of contract, breach of fiduciary duty, deceptive business acts, claims for monetary relief, as well any related lawyer’s fees.