How good is your escrow coverage?
By TERESA BURNEY
© St. Petersburg Times, published February 6, 1999
Once Tara Ross trusted her lender.
She paid her mortgage on time and had no reason to doubt that the venerable financial institution paid her property tax and homeowners insurance bills when they were due.
Then one day a couple of years ago a tropical storm was churning out in the gulf and the Sarasota youth minister called her insurance company to ask a question about her coverage.
She had no coverage, the insurance agent told her. She hadn't had a policy for a year because her lender had not paid the bill.
It took Ross months to find another insurance company that would write a policy on her house. "It was stressful," she said.
Such failures happen, say regulators from the Department of Housing and Urban Development, which handles disputes about lenders who don't pay their clients' property tax and insurance bills.
"It's becoming more of a complaint area for us," HUD spokesman Victor Lambert said.
Many people pay their property taxes and homeowners insurance a little each month through their mortgage. The lender then pays the bills when they come due. Mortgage companies like that setup because they can be assured that the bills are paid and their investment is protected. They also like it because most borrowers are required to give a year's worth of payments to the lender up front when they buy a house. The lender has the use of that money until the bills come due.
Most lenders pay the bills on time. But sometimes the system fails, Lambert said. That is why it is important for homeowners to keep an eye on their lender.
The risk when lenders neglect to pay insurance bills is particularly acute in hurricane-prone Florida, because it is often difficult for a homeowner to find a new policy at a reasonable cost, Lambert said.
"We have had cases where people have paid their mortgage timely, but for some reason their insurance policy was not paid," he said. "And when it wasn't paid and the policy lapsed it was much harder for them to get a new insurance policy."
That is what happened to Ross. She called her lender after getting a notice from her insurance company that it was about to cancel her policy. The lender assured her that the bill would be paid.
"They said, "Don't worry about it. It's going to be taken care of at the end of the month, when we pay all our bills,' " she recalled. "It never got paid, and I never received another notice that it had been canceled."
When Ross went looking for other insurance, she had trouble finding a company that would insure her house.
"I kept getting harassing letters in the mail (from the lender) saying "You need to provide us with a homeowners policy immediately,' " she said, even though it was the lender's fault that she didn't have one.
For a while, Ross had to buy an expensive policy provided by her lender.
"It took me months to find a policy," she said. "The lesson I learned is that I have to be vigilant."
That's the lesson HUD officials would like everybody to take.
Federal law requires lenders to send an accounting statement once a year showing how much money is in the borrower's escrow account and what bills were paid. Borrowers should check that statement against their tax bills and insurance bills to make sure they were paid when they were due. They should also check it to make sure that the address of the insurance company is correct, Lambert said.
All late notices should be taken seriously as well. Don't just assume that the lender will mail the check.
Property tax bills are due in November and considered late starting April 1. Florida law requires lenders to pay the bill in November, when there is a 4 percent discount. The county tax collector is required to notify you when a lender requests a copy of your bill and to notify you if your property taxes are delinquent. You can always call to make sure the bill was paid on time.
Find out when your yearly property insurance premium is due and check to make sure it is paid. Lenders frequently wait until the last minute to make the payment so they can have use of your money longer.
Watch especially closely if your home loan is sold to another servicer. That is when many problems occur, Lambert said. Ross' problem was complicated when her original bank was bought by another.
Sometimes an insurance bill will get lost because it is sent to the old lender. And sometimes the new lender might not ask the local tax collector's office for a copy of your tax bill, so the bill isn't paid. Or, it could be paid late, at the cost of a penalty that is passed on to you. You might not know that unless you look carefully at your escrow statement.
If you do have a problem, HUD regulators suggest you write a letter to your lender explaining the situation (see related story). They also ask that you let HUD know when it happens so the agency can help you get satisfaction and can keep track of the lenders that are the worst offenders.
Even though Ross' insurance had expired, the mortgage company continued to collect payments on her policy from her. HUD helped her get reimbursed for those payments. Sometimes HUD will even require the lender to pay the difference in cost between the new insurance policy and the old one.
"Trusting that things are going to be paid through an escrow account," Ross said, "just isn't going to do it."