Escrows Gone Wild!
July 29, 2010 7:00 PM   Subscribe

Magical Escrow! Why am I being charged so much?

Three months ago, I refinanced my home here in Massachusetts. The monthly escrow for taxes/insurance was estimated much too low to cover the fees and I got a notice from my mortgage company that the escrow would be need to bumped up.

While this is alone is cause for gnashed teeth, my escrow was in such a low state that it's now in the hole after paying the second quarter property tax (approximately $1600). In the notice, my mortgage company - PHH Mortgage if it matters- informed me of the new monthly escrow increase but also of a deficit to the tune of $600. There was about $1000 in the escrow at the time of taxes so I understand where the $600 number is coming from. What I don't understand is why the mortgage company added another $1600 to the deficit.

In the notice, the mortgage company stated that in order to recoup the deficit, the escrow need to have the negative balance AND the exact amount of of my property taxes. The notice gave me until August 31st to take care of the entire $2200 "deficit" or the amount would be parceled out to the next 12 months of my monthly payment. The mortgage company did, in fact, pay the second quarter taxes and the monthly escrow increase should provide for the third quarter taxes. As far as I can tell, this $1600 is not a penalty fee. It's mystery.

I have tried to talk to my mortgage company but could find no one with answers. I went up and down the chain of command but they were automatons.

So let me ask y'all. Why am I on the hook for this extra $1600 in quarterly taxes?
posted by anonymous to Work & Money (4 answers total)
The mortgage company is permitted to keep a sufficient balance in your escrow account so that they can never overdraw it. (Because if they get behind and then you quit making your payments, they're out the money, boo hoo.) They failed to do that, and did get behind, and they paniced and asked for enough more money to keep it from happening again. The extra $1600 is not a penalty, and they don't get to keep it. It goes in your account and provides them with a really fat cushion, which they don't have to pay you interest on.

If my experience is any indication, next year or the year after, their computer will notice that the cushion is too big and they'll reduce your escrow payment, very likely by enough that they'll eventually run out again. I went through this cycle three times before I paid off my 15 year mortgage.
posted by Bruce H. at 7:19 PM on July 29, 2010 [3 favorites]

I think Bruce H has it. We had a similar adjustment when we first got our loan. I believe there is a standard formula for adjusting the monthly amount, unfortunately it is not very highly damped which can result in large payment swings on a yearly basis till you reach a steady state.

In our case, the first year we were under which resulted in an increased monthly escrow deduction. The next year with the increased amount we were over which resulted in a decreased monthly escrow deduction. Unfortunately, you guessed it, the third year was again short resulting in another increase. Things did actually converge after 4 years, but the fluctuations were large enough to notice...

Interestingly, we're about to refinance and it seems like it will be difficult to keep this problem from arising again - specifically, I know the balance of my current escrow and the monthly contribution, but the title company seems to feel they know best, even though I know from experience that more funds will be required...I'm still not quite sure why this is so hard to compute, especially if you assume minimal property tax changes.
posted by NoDef at 7:42 PM on July 29, 2010

I had to call and bicker with Bank of America 2-3 times before I got my escrow account straightened out after a homeowner' s policy rate hike, and premium payment, followed by a switch to another insurance company, followed by a refund from the insurance company that lost my business... the thing that multiplies the pain (if you just let them do it their way) is having to make up the shortfall PLUS pay enough for an anticipated rate increase (even though I had a refund check come back, thus negating a lot of the shortfall, as well as securing low rates which negated the potential increase, so yeah...)

I ended up telling them to take out my property tax only (a small, predictable amount of money) and putting my homeowner's policy on electronic draft straight from my bank account to the insurance company. I prefer to let my mortgage company use as little of my money interest-free as possible.
posted by randomkeystrike at 8:16 PM on July 29, 2010

I don't know whether your mortgage is covered under RESPA, but if it is this U.S. Housing and Urban Development Web site might be of help.

Basically the analysis process finds the low point in the projected balance over the period (usually a year). A deficiency means that low balance is below zero, and a shortage means that low balance is below the 2 payment cushion. Obviously a deficiency is also a shortage.

The Bank is allowed to recapture deficiencies faster than shortages, and that's why you can end up with a very high new payment amount for a couple months, then somewhat lower, then lower for the remainder of the year. The format of the Analysis statement is suggested by RESPA also, and the compliant ones I've seen are relatively clear.
posted by forthright at 8:38 PM on July 29, 2010

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