Escrow Accounts

[Mack Perry]

Here is a question for the mortgage pro's in the forum. Is there any guarantee that taxes and insurance will be paid by a mortgage company?

With the recent events with many of the mortgage companies filing for bankruptcy or just getting out of the origination of loans what protects the borrower?

[Search Engine Idiot]

If a loan is impounded, anything in excess of the principal and interest goes into an "escrow" account, which is basically a savings account of the borrower's own money used to pay their bills. The accumulated funds are generally supposed to be held in trust in a non-interest bearing account.

Anyway, it is incredibly doubtful that these funds are at risk because even if a company does get in trouble or files bankruptcy, the loan servicing portfolio remains a viable asset and will be sold to another loan servicer. All that gets sold is the right to service the loans, not the loans themselves.

Mortgage loans aren't actually owned by the servicer (who you make your payment to) most of the time. They just earn income from servicing the loans.

[Mack Perry]

Thanks for your insight Terry. What has brought this question up is the fact that Homebanc Mortgage, a previous lender in the southeast, announced on Tuesday that they will no longer origianate loans due to not being able to draw on any lines of credit. In the past they not only originated but also serviced their loans. Last Friday their stock trading was suspended and it has been reported that the stock value has dropped 93% since January.

Countrywide is going to be handling their new business however Homebanc is to be handling the servicing of the existing loans. With the value of the company going to hell in a handbasket, I was just curious if the borrows had protection for their escrow accounts.

[ScottsdaleHomes]

Terry,

That was a great post. Thanks for the insight.

[waynelong]

Yes it was a great post!

I have not really thought it thru. I knew that there was a seperate fee paid to service the loan but I have always thought that the one who serviced the loan - owned the loan. I guess most are owned by like Freddie Mac, Fannie Mae and all that family and then the servicing of the loan is farmed out to whoever wants to do that portion of the business. Am I thinking of this correctly? If you originate the loan and then sell it - do you get first option to service it?

[Mack Perry]

Wayne, I spoke with Rick Tangum of the Ga. Dept of Banking and Finance and he stated that there is no insurance, like FDIC, or protection of an escrow account with Homebanc or any other lender. Looking to RESPA for an answer, I found that if you lender does not pay your taxes or insurance RESPA recommends that the borrower get an attorney.

As far as servicing the loan, it simply means that the lender that services the loan is entitled to earn the interest that the loan bares as well as hold the escrow funds for distribution. Once a loan is assigned to a lender they service the loan. If they sell the loan then the new owner services the loan.

[waynelong]

I think - like with any mishandled escrow account - there would be some serious consequences to funds that are mishandled. Maybe even some form of prosecution.