Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, May 2, 1993 TAG: 9305030323
SECTION: HOMES PAGE: E3 EDITION: METRO
SOURCE: DAVID I. TURNER KNIGHT-RIDDER/TRIBUNE
DATELINE: LENGTH: Long
A recent study by the U.S. Department of Housing and Urban Development found only about 10 percent of escrow accounts had more money in them than allowed under federal law.
Twenty-five percent of escrow accounts had so little money in the them that lenders had to advance money to cover the expenses, such as property taxes and homeowner's insurance, that are paid from the accounts.
The mortgage industry has been under pressure lately, with some critics saying lenders were holding too much of consumers' money in escrow accounts.
A group of state attorneys general, who have investigated complaints against some of the nation's largest lenders, has sought refunds for consumers who had too much in their escrow accounts.
Since the end of 1991, GMAC Mortgage Corp., Fleet Mortgage Corp. and Fleet Real Estate Funding Corp. have reached settlements with the state attorneys general, including those from Pennsylvania and New Jersey.
"There's no conspiracy or fraud out there in terms of this," said David I. Ginsburg, the president of Loantech Inc., a Gaithersburg, Md., firm that audits mortgage escrow accounts. He said most lenders have been quick to refund overpayments to his clients - who have collected as much as $4,000.
About 78 percent of home mortgages come with escrow accounts as a way of guaranteeing to the lender that expenses such as property taxes and homeowner's insurance will be paid.
Homeowners make monthly deposits into the account, at the time they make their monthly payments of principal and interest. The escrowed money is then paid out during the year as insurance and tax bills come due.
The federal Real Estate Settlement Procedures Act limits how much money may be kept in an escrow account. Typically, the balance is supposed to fall at some point in each year to about one-sixth of the anticipated expenses to be paid out of the escrow account during the next 12 months.
You may think of your escrow account as a single pool from which money may be taken to pay either taxes or insurance, but most lenders do not.
Instead, according to HUD, lenders usually break up escrow accounts into sub-accounts - one for each type of expense - and assume that money cannot be shifted from one sub-account to another if there's a shortfall. HUD has said that such "single-item" accounting is legal, even though it typically means that more money is withheld than would be if the sub-accounts were pooled.
HUD said that lenders on average are holding less money than they are allowed to hold in escrow accounts. In fact, they could increase the amount of money held in all U.S. escrow accounts by between $8 billion and $11 billion and still be operating legally.
But HUD also said that about 10 percent of escrow accounts hold too much of the consumers' money, and some of those are "overescrowed by large amounts." Two percent of escrow accounts contain more than nine-months' worth of excess payments, HUD said.
A homeowner who suspects that too much money is being held in an escrow account could try to analyze the account on his or her own, or the homeowner could hire someone to audit the account.
Homeowners who can't audit their escrow accounts on their own might ask their lender to review it, though that is likely to be a slow process, said Paul Havemann, vice president of HSH Associates, a mortgage-information company in Butler, N.J.
The Affordable Housing Act of 1990 - also known as the Cranston-Gonzalez Act - requires that lenders acknowledge a written inquiry about an escrow problem within about a month, and either fix the problem or explain why it isn't a problem within another month.
Among the firms that will review escrow accounts - for fees of about $100 or more - are Mortgage Monitor Inc., of Norwalk, Conn., and Loantech. They say they find errors in about 50 percent of the escrow accounts they audit, but not all errors result in refunds to the consumer. David Bernstein, of Mortgage Monitor, says refunds are paid on about 25 percent of the escrow accounts his firms audit.
You can get a handle on your escrow account - or on each sub-account - by setting up a table that lists the amount of money to be deposited and the amount to be paid out for expenses for each month over the next year. By tracking what happens to the balance each month, you can tell if you are escrowing a proper amount of money.
"It's not an exact science," said Ginsburg, of Loantech. But if your escrow account is working properly, each month you should be paying in roughly one-twelfth of the annual expenses covered by that account. And once each year, the balance should fall to amount equal between one-twelfth and one-fourth of the annual expenses paid out of the account.
Getting undercharged on an escrow account is not necessarily a good thing. You may be able to get away with it for a short period but eventually your escrow payments will jump sharply to make up for that shortfall and to cover the expenses in future years.
Ginsburg said he had one client, an elderly woman in Florida, who got a surprise bill for $1,500 because she had been undercharged on her escrow contributions for three years.
Bernstein, of Mortgage Monitor, said homeowners should check mortgage documents for information on their escrow accounts. In some cases, they may require that the escrow balance be lower than what RESPA would require.
For more information:
Loantech Inc. 301-330-0777.
Mortgage Monitor Inc. 203-853-3636.
by CNB