By Mike Whiting, SVP, Senior Tax Operations Manager
In part one of this two-part blog, my colleague, Jonnine Eras, examined some of the forces that are converging to create a perfect storm for borrowers with escrow accounts and their servicers. These trends include dramatic increases in homeowners and flood insurance premiums, significantly higher tax bills due to record home price appreciation, and the expected downturn in commercial real estate values that could erode the tax base in some communities and shift more of the tax burden to homeowners. If any or all of these factors come into play, millions of borrowers will face higher monthly mortgage payments, and servicer call centers will experience higher call volumes as they deal with confused, and most likely unhappy, borrowers. In the second part of this blog, we’ll explore what servicers can do to get out in front of the anticipated wave, help borrowers better anticipate coming escrow increases and reduce the amount of escrow advances on servicers’ books.
Not all of the trends we discussed in the last blog will affect all borrowers and, in any event, the impact will be spread out over time. But certain large markets such as California, Florida and Texas will experience a significant impact. A recent Wall Street Journal article, for example, looked at the impact of insurance premium increases in one upscale Florida community and found that homeowners were selling because they could no longer justify the high insurance premiums.
“Home insurance costs are rising everywhere, but they are rising especially fast in Florida where premiums have tripled in the past five years,” the article said. “Some premiums have increased by about nine times what they were last year, according to Oscar Seikaly, chief executive of NSI Insurance Group…. ‘When you have a home that’s one million dollars or less, your insurance premium becomes higher than your mortgage,’” he said.
Although the average homeowner has experienced significant home price appreciation over the last three years, there is often a delay in how quickly this translates into increased tax assessments and higher tax bills. Also, property tax laws in a number of states will soften some of the impact for certain types of homeowners, like seniors and long-time residents.
In fact, homeowners in some markets may see a reduction in their taxes in 2024. In Texas, for instance, Senate Bill 2, which was signed by Governor Greg Abbott and will be voted on in early November, will deliver the largest property tax cut in Texas history. Of course, from a servicers’ perspective this will mean more work, and more calls and confusion, as escrow account balances are adjusted and surpluses are sent out to borrowers.
Having said that, higher monthly mortgage payments are coming: the only questions are when and by how much? And when they do, servicers will be unfairly blamed for forces outside of their control. In addition, if, as the Wall Street Journal recently reported, some borrowers will be unable to make these higher payments, servicers will be on the hook for advances. In any case, they will be facing additional call volumes at a time when many servicers are reducing staff to control costs.
So, what can servicers and their tax and other providers do to get ahead of the wave?
Being able to anticipate significant tax and insurance premium increases as early as possible is key to mitigating some of their impact.
In some respects, smaller servicers that focus on a single market or regional footprint may have an advantage in terms of seeing what’s happening sooner given their in-market proximity.
From a tax perspective, for example, servicers will want to proactively monitor major tax legislation, like Texas’ Senate Bill 2, that impact large segments of their portfolio, rather than waiting for annual escrow analyses.
Larger, national servicers may consider using various forms of portfolio monitoring to identify accounts that may be at risk for significant tax or insurance increases. For example, they may choose to run AVMs against properties in markets that have experienced high home-price appreciation in order to project possible tax outcomes. Relatively recent valuations are also available for millions of loans that were refinanced in the past three years and, as such, can provide a basis for comparison against tax assessment.
LERETA can provide clients with alerts or reports when a material increase in a single tax bill is identified, assuming these assessments are available earlier in the year. Servicers may want to discuss these and other options with their tax service providers.
To get ahead of insurance issues, servicers may consider data mining their portfolios to identify accounts that could be impacted by insurers that have pulled out of certain markets, like California and Florida.
Since higher tax and insurance bills often pose an elevated risk to reverse mortgage borrowers, servicers may want to monitor these accounts more closely to make sure that Life Expectancy Set Aside (LESA) accounts are still adequate. Although LESA accounts are designed to last for the borrower’s lifetime, there can be shortfalls, and when this occurs the burden falls on the borrower which can result in increased defaults.
Being proactive
Most servicers that we talk to are taking the escrow cliff seriously and developing proactive programs to reach out to impacted borrowers as soon as possible. The nature of this outreach can take several forms:
- Individual borrower letters, emails and even outbound calls alerting customers to pending increases and giving them the option to start adding to their escrow accounts earlier.
- More detailed escrow account communications.
- General messages about these issues on monthly statements and on servicer websites and even on IVR hold messaging.
- Finally, to be ready for higher call volume, many are developing updated scripts to address new escrow issues for call center associates.
As someone who in the past has managed escrow administration for several large servicers, I know first-hand how painful a topic escrow increases are for servicers and customers alike. Everyone is excited by the thought of their home increasing in value. However, it is often a shock when the tax bill arrives, and then the blame, unfairly, shifts to the servicer.
For more information contact us at sales@LERETA.com.
