Insurance & Taxes
Managing escrow for insurance and tax purposes can provide an additional profit opportunity for mortgage lenders, or it can be a great big headache. In some cases, servicers may face a little bit of both. Escrow accounts provide an opportunity for lenders to gain valuable "float" income, as long as it's allowed under state and federal law. But lenders that hold too much money in escrow could find themselves running afoul of regulations. And some state laws have an impact on whether or not lenders must pay interest to consumers for escrow accounts.
With interest rates at record low levels in recent years, lenders have been able to obtain some relief from calls that they should pay interest income to consumers. But low interest rates on escrow accounts also means that lenders themselves receive less float income.
Nonetheless, maintaining escrow accounts for insurance and property tax bills is a good way for servicers to make sure that the collateral for their loans remains unencumbered. The same borrowers who stop making payments and end up in foreclosure are not likely to be making timely payments on property taxes either. That means lenders run the risk of finding a tax lien against the property if they do have to pursue foreclosure.
And a homeowner who isn't maintaining insurance coverage for hazard, flood and other perils is a homeowner who risks losing everything to fire, flood, wind or earthquakes. In the rare instances where a home is severely damaged by those perils, you can bet the homeowner isn't going to keep making mortgage payments if the home isn't insured.
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