By Jim McGurer, SVP Operations
By law, servicers are required to conduct escrow analyses (EAs) on most first mortgage accounts every year. The timing of when these analyses are done and when the statements are sent to borrowers is left up to the servicer. While LERETA is able to accommodate any schedule, there are some best practices in terms of scheduling that we recommend, because they have been shown to be less confusing for homeowners and less disruptive for servicers, in terms of in-bound calls and the need for advances. In general, servicers tend to take one of two paths when scheduling EAs: They either do it based on the customer’s statement date or after a full year’s tax payment has been made. Across the industry, probably 20% of servicers use the statement date cycle vs. 80% that wait until the prior tax year is completed.
In our experience, there are significant advantages to the latter approach. Here’s why. When you do an analysis based on the statement date, it can fall between tax cycles. This can result in surprises for the borrower based on estimated tax and insurance bills that have yet to arrive.
These issues can be magnified in certain tax jurisdictions, like Cook County, Illinois. That county, for example, has a two-payment tax cycle in which the first payment is a provisional tax payment equal to 55% of the prior years’ annual tax, and the second payment is often larger to reflect the total payment for the year. So, if a servicer runs an analysis based on the first installment, they run the risk of severely underestimating the next year’s full tax bill and creating an enormous shortage in the customer’s account.
By using the tax cycle method, the EA would be based on the full year’s payment.
A few years ago, we did an analysis for a large servicer that was using the statement-date approach that showed them the economic consequences of this non-optimal schedule. In an effort to normalize the workload throughout the year, the servicer was running their EAs monthly, based on their state counts. But they hadn’t taken into account the timing of the tax installments. As a result, the servicer was advancing millions of dollars every year to cover escrow shortfalls. Our findings suggested that they could significantly reduce these advances by simply moving to a tax-cycle schedule.
Having highlighted the benefits of tax cycle scheduling there is a caveat that servicers need to be aware of if they are planning to make the switch from statement date to tax cycle. The first year that you change the schedule, there will be one-time shortages for many of your borrowers, since their EAs will be moving backwards. So instead of doing the EA in March, it will be done in February and there will be one month’s less money in the account. Over time, this will most likely create less confusion, but year-one it is something to consider.
Historically, EAs have pretty much always been under the radar. But as my colleagues have pointed out in a recent series of blogs, this is about to change thanks to coming increases in real estate taxes as well as both homeowners and flood insurance. And there are signs that this is starting to happen. Just last month, the Washington Post ran article with a bold headline: “Mortgage Payments Change Because of Escrow—What’s That?”
Given the heightened awareness and concern about rising monthly payments for tax as well as for insurance, servicers, depending on their portfolios, might want to consider running off-cycle EAs. Traditionally they haven’t done this on a widespread basis due to the cost. But if it can help customers get in front of a shortage faster, lessening the shock and reducing escrow advances, we may see this. Most servicing systems allow a servicer to run a trial ahead of time to see what that shortage would look like. If a servicer sees an area of the country or a particular month of the year where there is a sharp upward spike in escrow advances, that might sign that trial EAs would be prudent.
For more information contact us at sales@LERETA.com.