Abused By Lender's Greed?
"Mortgage escrow is a viable concept that has been abused by lender's greed," according to David Jones, a financial expert with the
Family Business Institute
In most cases, when a residence is purchased it is financed with a mortgage. The lender also handles the property tax and insurance through mortgage escrow, collecting an amount each month along with principal and interest and paying the annual bills to the County and insurance company.
There is some logic and justification for this. If the owner were to not pay property tax, eventually the taxing jurisdiction could seize the property and sell it to pay the tax arrears and interest. If the owner doesn't pay the insurance premium, coverage lapses. In either case, the lender's security is jeopardized. So it is in their best interests that the property, which secures their loan, is not impaired.
Mortgage Escrow Is Regulated
Mortgage escrow and lenders are covered by the federal Real Estate Settlement Procedures Act (RESPA) of 1974, as amended.
My request to change property tax payment date
I recently had a situation where I wanted to have the property tax, which is due and payable March 31, 2006, paid in January 2006. The county offers discounts of various amounts for payments received early -- from November 2005 through February 2006.
RESPA does provide that lenders should pay from mortgage escrow by due dates or before penalties are incurred.
First response: "We can't do that"
When I first contacted my lender's property tax department to request that they not prepay until January 2006, I was told that they could not, because RESPA required them to pay "so as to avoid penalty."
I was a bit surprised and wrote back to point out that mortgage escrow was them holding my money in trust to pay my property tax obligation, which in any event was not due and payable until March 31, 2006. Still, they said they could not do it for me. It took them from the beginning of September to early November to reply.
Next, I said: " Fine, I'll pull out of the mortgage escrow and handle it myself."
Next response: "You can leave mortgage escrow, but only after the next scheduled payment"
"Well, you do meet the criteria to be released from escrow -- the loan to value ratio is well under the limit; you have made all payments in to escrow for 36 months; you have an acceptable credit rating. But it is within 30 days of scheduled payment and we cannot stop the payment."
"It is your arbitrary November payment date that we are within 30 days of. And it's your delay and poor service that has brought us to within 30 days."
Third response: "Doesn't matter that we caused the delay. Still have to wait until after scheduled payment AND it will cost you $250 to be released"
"We're sorry, but we cannot do anything until after the payment. Then we can release you from mortgage escrow, but the fee for that be $250."
A $250 fee that I am to pay to stop them from doing something I do not need or want them to do anyway!!
During this frustrating negotiating period, my annual escrow accounting arrived with projections for 2006.
Another mortgage escrow rip-off
Studying that reminded me of yet another escrow provision that works against me.
This same Act that supposedly controls the terms of my money placed in escrow to protect them lets them plan and collect my escrow payments so that there is always a projected minimum of 1/6 (two months) of payments on hand in that account.
I still have no explanation of why that amount is needed.
The reason, of course, is that the lenders found a convenient way to have the government give them a HUGE source of funds that they can use temporarily. They do not need money in my escrow account until it is time to pay the tax or insurance premium. And they do not pay me any interest on the funds I am required to lodge with them. But that lender will certainly be investing all those extra dollars in the short-term market and keeping the interest for themselves.
By now I was thoroughly ticked off by the high-handed treatment I was getting from lender's staff.
When I consider that I do not need this mortgage anyway -- it is only there because the 5% tax deductible cost is much less than my broker is able to earn on the fund's that I would otherwise use from the portfolio to pay off the mortgage. So I decided to use the brokerage / investment side of the financial institution to get some leverage against the mortgage side.
Use leverage to get problems solved
I pointed out that they would have a double loss if I pulled the funds out of the portfolio to pay off the entire mortgage that I did not need anyway but that they were making a good return on.
Next day, both brokerage and mortgage sides were in contact!
That got results!
It turns out they could defer the scheduled payment, and would do so, but only this once. Now, I know they aren't breaking the law to accommodate me. Someone in a position of authority obviously decided that their internal procedures could be changed. That it was their policy not RESPA that decreed early payment to take advantage of discounts.
"However, I need to do the same thing in 2008. Since you will not accommodate a second time I still need to stop the escrow."
"That is fine. And, of course, we will waive the usual fee."
My bottom line
The bottom line for me is that I am out of their punitive escrow, with no penalty fee, and therefore no need to lodge a chunk of my money with them for no good reason at all and with no compensation.
Your bottom line
Your bottom line... if you are still in escrow when you do not need to be, look into getting out of it. It is a rip off designed to provide a huge cushion of short-term funds that the lenders earn interest on instead of you.
Don't forget to use leverage and go "up the line" until you get what you need. So many businesses these days don't give their front-line staff either the training or the authority to look after customers - they are just taught to spout the standard policy that is best for the business. You have to push to get a supervisor to authorize exceptions.
Of course, on the other side of the coin, you wouldn't want your employees to mistreat customers in such a manner, would you?! Your front line employees are well trained and have the necessary authority to see that your customers are properly looked after, right?
Incidentally, the Act that was passed by our federal representatives in Washington was written by the mortgage industry for the benefit of the mortgage industry.
Family Business Experts Understands
Family Values and Business Systems
Return from Mortgage Escrow to