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February 8, 1999
"Is it wise to
try and get the lender to waive the requirement that taxes and insurance
premiums be placed in escrow? I would rather manage that money myself and
earn the interest on it. How do I negotiate this point with a
lender?"
Lenders
generally require borrowers to include taxes and insurance premiums in
their monthly mortgage payments, and placed in escrow until the payment
date when the amount due is paid by the lender. The rationale for the
requirement is that it prevents a weakening in the protection provided to
the lender by the property. If the taxes are not paid, the tax authority
could place a lien on the property that would have a higher priority than
the lender's lien. Similarly, if the house burns down or is flooded away,
the lender's protection goes with it if the insurance premiums had not
been paid.
Few question the right of lenders'
to protect themselves against hazards to the properties protecting their
loans. However, many question the legitimacy of a side effect of escrow
requirements, which is that lenders obtain the use of borrowers' money for
the period until payments are made. Most lenders, therefore, will waive
escrow requirements if the borrower makes a down payment of 20% or more.
The logic of this waiver is that if the borrower has that much equity in
the house, it is safe for the lender to rely upon the borrower's
self-interest to pay the taxes and insurance premiums.
So, if you intend to put down 20%
or more, let the loan officer know upfront that you will not be escrowing.
If you intend to put down less
than 20%, it becomes more complicated.
In most states, lenders are willing to waive escrows for a fee -- usually
1/4 to 3/8 of a point. However, in D.C., Illinois, NY and Oregon lenders
are barred from charging a waiver fee, which means that they may be less
willing to waive escrows in those states.
A reason to avoid escrows that is
even more compelling than the loss of interest is that occasionally
lenders screw it up, as indicated in the following letter.
"For the second time
in three years, our mortgage company� has erroneously deducted funds
(almost $1300 the first time; over $700 this past time) from our escrow
account allegedly to pay property taxes. Checked with our County Treasurer
to discover that even though they sent our property tax bill to the lender
our taxes were not paid. The county has added interest and penalty fees to
our tax bill. Repeated phone calls, faxes, (including one to the CEO),
certified mail, etc. have gotten us no where. Do you have any
suggestions?"
This is an
infuriating experience, and one of the reasons is that there is so little
you can do about it. I advised the writer that the person to get to is not
the CEO but the vice president in the servicing department in charge of
tax escrows. You then provide that person with the evidence that the tax
bill was sent and the money deducted from the escrow account but not paid,
and insist that the bank pay for the lost interest and the tax penalty. If
this doesn't work, follow
the suggestions in Is
There Recourse Against Bad Servicing?
Warning! If you are shopping for a
new mortgage, don't get so preoccupied with avoiding escrows that you lose
track of the fact that you are involved in a multi-dimensioned negotiation
that involves interest rate, points, and other fees. A possible waiver of
escrow is a small part of the deal. If the loan officer can induce you to
pay a point above the market, for example, you probably won't have any
difficulty getting him to waive the escrow requirement without a fee.
Copyright Jack Guttentag
2002
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