Escrow shock

How it works

Your escrow account pays your property taxes and insurance. When a bill comes due and the escrow balance cannot cover it, the servicer advances the money and the escrow balance goes negative.

At the next escrow analysis, that shortage is recovered. The new monthly payment is the ordinary escrow requirement plus a shortage repayment, usually spread over twelve months, on top of principal and interest. A single large advance can more than double the required payment with one notice.

The payment increase is not a penalty and not an error. It is arithmetic. But it arrives as a notice rather than a negotiation, and the borrower who keeps paying the old amount is now making partial payments — which is how escrow shock becomes an unapplied-payment problem and then a credit reporting problem.

Escrow is the largest single driver of mortgage servicing complaints.

What it looks like on your statement

• An escrow balance moving from roughly zero to a large negative in one or two days
• Disbursement lines for county tax and for city or utility assessments, often separate
• An annual escrow account disclosure statement showing a shortage and a new payment
• A required payment that changes on a stated effective date, with the escrow portion shown separately and often close to the principal and interest portion
• Supplemental or reassessment tax bills, which are the usual cause after a purchase or transfer

What the disclosed terms permit

RESPA, 12 C.F.R. § 1024.17, governs escrow accounts. It permits a cushion of up to one-sixth of annual disbursements, requires an annual analysis, and allows a shortage to be collected over at least twelve months. It requires the servicer to send an annual escrow account disclosure statement showing the computation.

So the increase is permitted. What is also required, and worth checking, is the arithmetic: the analysis must show its work. Escrow shortages that were caused by the servicer failing to disburse on time, or by a cushion above the permitted maximum, are correctable.

What to send

1. Request the escrow analysis and the disbursement history. RESPA entitles you to the annual escrow account disclosure statement; a Request for Information under 12 C.F.R. § 1024.36 gets the underlying detail.
2. Check the cushion. More than one-sixth of annual disbursements is over the limit.
3. Check the timing. If the servicer paid a bill late and incurred penalties, or paid a supplemental bill it was not required to pay, the shortage figure is wrong.
4. Ask to spread the shortage over longer than twelve months. Servicers may permit it and often will if asked in writing before the new payment takes effect.
5. Pay the new amount, not the old one, from the effective date. Paying the old amount is what converts an escrow problem into a delinquency. If you cannot, say so in writing before the date rather than after.

Documented cases