Special Report: Escrow Management
Many homeowners are perfectly reliable when it comes to paying their insurance and tax bills on their own. But if you've made a loan worth upwards of 80% of the home's value, there's a lot at stake in making sure those payments get made.
As a result, most lenders require the mortgage servicer to make those payments, at least in cases of high loan-to-value ratio loans and in some cases for all loans.
That helps to protect the collateral. If a natural disaster or fire occurs, the lender can rest assured that insurance is in place, even if the lender had to "force-place" that insurance. The lender doesn't have to worry about a municipality seizing ownership of the collateral for back payment of taxes. That allows mortgage investors to rest a little easier.
But it also means that mortgage servicers have more work on their hands, and more to worry about. Historically, escrow accounts have been a source of litigation risk for lenders. While most of the attention on reform of real estate settlement laws lately has focused on loan origination issues, the same federal settlement law, known as RESPA, that prohibits kickbacks also provides parameters for managing loan escrow accounts.
To manage escrow effectively, servicers need to know when tax and insurance bills are due, who to send payment to, and what the rules are for making those payments. They also have to worry, particularly in the case of property taxes, about potential penalties for late payment.
And they have to be aware of rules, which can vary, regarding the payment of interest on escrow accounts. With today's low interest rates, few homeowners are screaming about missing out on interest on their escrow balances. But the issue could someday rise again to haunt the industry.
With the pace of refinancing poised to slow, loan boarding and loan payoffs may finally abate, giving servicing managers an opportunity to reexamine other issues like escrow management. Hopefully they will find technology tools and management trends are progressing in such a way as to make the administration of tax and insurance bills less burdensome. Greater efficiency can only enhance profitability.
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