Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, May 20, 1993 TAG: 9305200077
SECTION: BUSINESS PAGE: B7 EDITION: METRO
SOURCE: Associated Press
DATELINE: WASHINGTON LENGTH: Medium
When Freeda's monthly escrow payment for home insurance and taxes grew to more than six times his principal and interest, he suspected something was wrong.
His tale of escrow woe unfolded Wednesday at a hearing of the House Banking Committee's community development subcommittee on a bill to prevent lenders from overcharging homeowners.
Lawmakers, law enforcement officials and consumer advocates said some mortgage lenders overcharge homeowners hundreds of dollars a month, producing billions in interest-free cash they invest for their own gain.
A 1990 report prepared by the attorneys general of California, Florida, Iowa, Massachusetts, Minnesota, New York and Texas estimated that more than two-thirds of mortgage escrow accounts have higher balances than permitted by federal law. The average overcharge was $150 per mortgage. The report estimated that the total overcharges amounted to between $2 billion and $4 billion nationwide.
A separate study conducted by the Department of Housing and Urban Development estimated that the number of "over-escrowed" accounts was closer to 10 percent. HUD found that more than a half-million accounts - 2 percent of the total - were overpaid by at least nine months.
While estimates of the problem varied, a banking industry official said the proposed bill would cost the industry and consumers millions.
The proposal by Banking Committee Chairman Henry Gonzalez, D-Texas, would require lenders to pay a standard savings account interest rate on escrow accounts. It also would allow borrowers to pay their own insurance and taxes once they own 20 percent of their home.
Freeda put down 30 percent on his Wantagh, N.Y., home in 1965.
"My monthly payment to the bank was $182.42, with $99.40 being interest and principal, and $83.02 for escrow," Freeda said. As of May 1993, the principal and interest still was $99.40. But his escrow payment had ballooned to $606.29 per month.
Freeda said he suspected that increases in taxes and insurance didn't fully explain the rising escrow cost. The mortgage watchdog firm Freeda hired, Mortgage Monitor Inc. of Norwalk, Conn., found Freeda had $780 more in his escrow account than needed.
The six New England states, California, New York, Iowa, Maryland, Minnesota, Oregon, Utah, and Wisconsin have laws requiring banks to pay interest on escrow accounts. But the laws don't apply to federally chartered banks. Gonzalez said federal law, including a 1990 statute he co-authored, allows banks too much latitude in handling escrow.
"Any attempt to make even a minimal effort to protect the public, like this one, was always met with stout resistance from the banking industry," Gonzalez said.
Chris Lewis of the Consumer Federation of America predicted that passing the Gonzalez bill "will be an uphill battle, but it's pretty clear it's the banks versus the interests of homeowners."
The banking industry protested that the proposal would yield only about $21 annually in interest to the typical mortgage holder and that the costs would be passed back to consumers. Steven Ashley, president-elect of the Mortgage Bankers Association of America, told the panel that on a $100,000 loan, banks would charge the home buyer an additional $224 at settlement to cover an interest requirement.
New York state Attorney General Robert Abrams, who organized a multistate investigation of alleged escrow abuses, said the argument of the banking community against reform keeps changing.
"Initially, they said there's no overcharging. Then they said it's a minor number. Now that it's a big number, they say we've got to be careful, it's going to shift onto the individual consumer," Abrams said.
"Lenders have a financial incentive to keep the escrow cushions as large as possible," and forcing them to pay interest would remove that incentive, Abrams said.
by CNB