Most federally backed mortgage lenders are required to provide annual statements regarding the status of each escrow account it services under §2609(c)(2) of the Real Estate Settlement Procedures Act. While this section tells mortgage servicers what to do, §1024.17 of Regulation X tells them how to calculate your escrow payments.
The first step projects the taxes and insurance anticipated to be paid over the next 12 months. Say, for instance, that you your mortgage servicer is preparing a statement in December for the following calendar year. Based on available information, you anticipate that a $1,000 tax bill will come due in March, your home owner’s insurance annual premium of $350 will come due in May, your school tax of $1,500 must be paid by August. If you pay mortgage insurance or flood insurance, you would also need to add those premiums into the equation. But based on the numbers provided, you would have to pay $1,000 + $350 + $1,500 or $2,850.00 during the calendar year. Take that number, divide it by 12 months, and you get a monthly average of $237.50 ($2,850/12).
The next step is to determine when the escrow account gets to its lowest balance to avoid having the account go negative. As you can see in the chart below in the second column, the $237.50 monthly payment calculated in the first step is credited each month and the taxes and insurance paid are subtracted in the third column. The result is listed in the fourth column to determine at what point, if any, the escrow account goes most negative (shown in red in the chart below). The $950.00 is then added to each figure in the fourth column to bring all of the numbers at least to $0. This $950 is then divided over 12 months (950.00/12=$79.17) and will be added to the $237.50 in the second column.
Regulation X also permits servicers to add a cushion of no more than 2 months worth of escrow (or 1/6 of the anticipated expenditures) to cover any unanticipated increases in taxes and/or insurance over the next year. Provided the escrow account does not already have such a cushion at the time the analysis is made, $39.58 (($2850.00/6)/12) is added to the monthly escrow payment.
So, under these facts, the escrow payment would be $237.50 + 79.17 + 39.58 or $356.25 each month which is added to your monthly principal and interest payment to determine your monthly mortgage payment.
Some servicers design their escrow statements a bit differently from this calculation, but as long as they (1) determine expected expenditures during the following year, (2) avoid negative balances by pro-rating the anticipated low point during the year, and (3) add no more than two monthly escrow payments , they should be good to go. Most problems occur when mortgage payments are missed and escrow accounts therefore depleted.
Escrow analysis is particularly tricky at the beginning of a Chapter 13 bankruptcy. The purpose of the filing is usually to save the home, so payments going forward need to be determined. Since most cases involve circumstances in which payments have not been made for a significant period of time, the escrow account is generally negative. In that case, the negative balance that exists at the time the bankruptcy is filed is added to the rest of the arrearages and paid through the Chapter 13 plan over a 3 to 5 year period. Since the escrow account will therefore start at $0, the low point calculation is also added to the arrearages as an anticipated escrow shortage. If these deficiencies were required to be paid over the next 12 months, such payments would be impossible for many homeowners thus thwarting the intent of the filing. However, parties must beware that while servicers may generate the initial escrow statement properly, the statement for the subsequent year must be based on the initial bankruptcy calculation and not the actual escrow amounts since the deficiencies created before the filing are already being paid through the plan.
I apologize to those who read blogs to avoid math. But sometimes it is just required. If your head is spinning and you just can’t handle all the numbers, contact us. We give second chances on Second Street.
Month
Payment
Disburse
Low Point
Adjust Low Point
Cushion
Jan
+$237.50
$0
+$237.50
$1,187.50
$1,227.08
Feb
+$237.50
$0
+$475.00
$1,425.00
$1,464.58
Mar
+$237.50
-$1,000
-$287.50
$662.50
$702.08
Apr
+$237.50
$0
-$50.00
$900.00
$939.58
May
+$237.50
-$350
-$162.50
$787.50
$827.08
June
+$237.50
$0
+$75.00
$1,025.00
$1,064.58
July
+$237.50
$0
+$312.50
$1,262.50
$1,302.08
Aug
+$237.50
-$1,500
-$950.00*
$0.00
$39.58
Sept
+$237.50
$0
-$712.50
$237.50
$277.08
Oct
+$237.50
$0
-$475.00
$475.00
$514.58
Nov
+$237.50
$0
-$237.50
$712.50
$752.08
Dec
+$237.50
$0
$0.00
$950.00
$989.58