Escrow Issues Are About to Take Center Stage: Now Is the Time to Test for Escrow Analysis Compliance

Josh Fieldgrove

Joshua Fieldgrove, Vice President Servicing Oversight at Clayton

The vast majority of mortgage holders pay their real estate taxes and various insurance premiums—homeowners and, in some cases, flood and mortgage insurance—through escrow accounts. While these accounts usually don’t get that much attention, there are signs that this is about to change. Last month, for example, The Washington Post ran a feature article on escrow accounts, and other media outlets have devoted a fair amount of attention recently to rising real estate taxes and higher insurance premiums.

Undoubtably, higher taxes and increased insurance costs, as well as inflation, will cause financial difficulties for borrowers who are challenged financially and at the same time cause confusion and anxiety even for borrowers who have the wherewithal to make higher monthly payments. In a recent survey of homeowners, nearly half the respondents said they could not make their monthly mortgage payment if it increased by 25%, and another 30% said that they would be financially distressed if this occurred.

Given the expected increases in both property taxes and insurance, this scenario is unfortunately going to play out for many borrowers. At the same time, it will create both operational and economic challenges for servicers as they handle more incoming calls from distressed borrowers and are forced to advance funds against shortages. 

The first quarter is a great time to consider testing these processes. Clayton’s Servicing Oversight group works with major servicers and subservicers on behalf of investors and MSR holders to test for a variety of escrow-related issues.

At the most basic level, these include validating that the servicer is completing an escrow analysis at least once every twelve months, as required by RESPA. It is not uncommon that servicers miss the twelve-month deadline and fall out of compliance with the annual requirement.

The reviews also validate:

  • The actual amounts calculated and listed on the analysis.
  • If the escrow account was used strictly for approved escrow items (i.e. taxes and insurance).
  • If the estimated escrow disbursements for the upcoming year are reasonable based on the amounts the servicer disbursed over the past year.
  • That the required escrow cushion is calculated correctly. Servicers are not allowed to inflate estimated disbursements and, in turn, inflate the escrow cushion, in an effort to prevent an escrow deficiency. 
  • In cases where there are escrow shortages, Clayton reviews for evidence that the servicer continued to advance funds to pay the taxes and insurance to preserve the investor’s interest in the property, a requirement regardless of the escrow account status.

If the servicer makes any tax or insurance payment late and is assessed a fee, that fee cannot be passed onto the borrower. The review identifies recurring late payment trends and assures that borrowers are not improperly charged for penalties.

Testing can also identify trends that can mask delinquencies and create shortages in future escrow cycles. For example, in the past year, several clients were advancing the borrower due date when the borrower submitted payments well short of the complete principal, interest, taxes and insurance (PITI) payment. The servicers were applying the funds available to principal and interest and attempting to collect the remaining taxes and insurance in subsequent payments. This tends to mask delinquency rates in part as borrowers are truly not making contractual payments that would warrant rolling the due date to remain current. Inevitably this is an unsustainable cycle as the borrower will have a substantial shortfall and will have a vastly increased escrow payment the following year to cover the deficiency.

As the potential for escrow shortages escalates, making sure that your processes are part of the solution, and not part of the problem, is more important than ever.

Scroll to Top