Wondering How Lenders Are Making Up for Missing Credit Card Fees? Check Your Home Escrow.

Following credit card reform, interest rates on credit cards have gone up, but this is not the only way lenders are making up for lost fees. My own home loan escrow was recently reset, and increased by about $120 a month on a $1,450 loan. I saw similar things happening to clinic clients and decided to inquire. My taxes and insurance went up roughly $750 or about $60 a month. So what, I wondered, explained the extra $60 a month I was being charged? 

The gentleman I reached at my lender (and yes I did find a live body) was super-polite. He explained that the extra $60 was the “voluntary” portion of my escrow. I asked why he called it voluntary.  He said this was the voluntarily portion because “if you would prefer not to pay it, we will stop charging you for it.”

This begs the question of why anyone would want their lender to hold this money for them. Multiply this practice over millions of mortgages, and this really will help lenders’ bottom lines. If you don’t want to help in this way, however, be sure to inquire and let the lender know.

Correction:(10/13) I originally misstated the increse in my monthly escrow payment as $200, not $120 a month, and attributed $80 to the "volunarty" or "unaccounted-for" portion, when the correct amount for the "unaccounted-for" portion is  $60 out of the total $120 increase.  I apologize for the confusion.

 

Comments

[Scott Pfenninger]

Escrow accounts are not balance sheet items and should not affect the bank's bottom line. The money just sits there, as far as I know, and is not allowed to be invested or lent out. It isn't making the bank any money, but it isn't making you any money either.

[Ted K]

Pfenninger--what time yesterday were you born??? Morning, afternoon, or evening???

[Patches]

It could manufacture a default if you keep paying the same amount. It would be a default on a voluntary cushion of sorts but will the Servicers computer pick it up as such?

[Scott Pfenninger]

Ted - I would appreciate your explanation as to how the bank utilizes the money for their own profit. I understand how it works if you "self-escrow" and keep the money in a checking or savings account, which reflects on the bank's balance sheet. When you make a deposit in a bank account, you are lending money to the bank. However, the whole purpose of an escrow is that the bank holds money on your behalf. You aren't lending them money, so they aren't allowed to invest it.

[Mike Dillon]

You're kidding me - a "voluntary" portion of ANY kind of payment involving a mortgage? 1.) I've never heard of such a thing...2.)I've never heard of such a thing with regard to escrow payments. Correct me if I'm wrong, oh scholarly ones, but if a "voluntary" payment ain't spelled out in the mortgage contract and you're charged for it that would be.... ummm... what's the phrase... oh yeah... Breach of Contract.

Professor Martin, I remember speaking with you a few years ago by phone with regard to servicer issues so I have to ask - was this your actual lender/note holder or a third party servicer with whom you are dealing? Because if this is a third party servicer, and they're adding in "voluntary portions" to escrow payments, would this not also constitute tortious interference with contractual relations? Especially if the borrower ends up defaulting on the loan b/c of the artificially and **intentionally** inflated payments... Now we have a potential scheme... Monthly mortgage statements sent by USPS? Mail fraud. Any payments made by Western Union "Quick Collect"? Wire fraud. And now we're off to the races....Hmm...Could THAT be part of the push to eliminate monthly statements?

Thank you for the heads up on this one, Professor. I never cease to be amazed/disgusted with the things constantly floating to the surface...

Patches, I can hear your brain spinning from here... ;)

Mr. Pfenninger, I believe you have at least one viable answer. Accounting is the key here... And, much like the float involved in servicing, I would imagine that, if parked in the proper vehicle, this "voluntary" payment portion would generate significant interest which could then be "explained" by accounting. Using Professor Martin's "extra" $120.00/month figure, pull that on 100,000 loans and you've suddenly got an "extra" $12 Million per month upon which to simply collect interest - if you decide not to get any more "creative" than that...

And Patches is correct in the scenario put forth. The voice on the phone says "OK. You don't have to pay that extra $120.00." But the computer isn't told to stop charging it. And suddenly Professor Martin is now 30 days in default and sliding down the slope to foreclosure. UNLESS, of course, she got that cancellation of the "voluntary" payment in writing....

What do you think the chances are that John and Jane Q (multiplied by a few hundred thousand) are on top of their game enough to realize that their payment increased b/c of an escrow increase? OR that they'll call and a.) get a human with whom they can actually communicate and b.) actually get a straight answer like the above?

At the time that USA/Curry v. Fairbanks settled, I believe then Fairbanks was claiming that roughly 40% of their portfolio was perpetually in some phase of default. At the time they were servicing roughly 750,000 loans. USA/Curry had 281,100 certified victims in the class. If a train leaves Chicago at 7 pm.... Could it REALLY be that coincidental?

[john]

Banks use this money to collect intrest from the Treasury... Banks are super capitalized because Turbo Tax Geitner is paying 3-4% on this "reserve currency"... the more reserve capital they have the more free money with no risk...or should I say tax payers are paying the banks. Pay your taxes, millions on welfare and the banks depend on it.

[Guest]

@John 6:59am "Turbo Tax Geithner is paying 3-4% on this "reserve currency"

No, the Fed is paying 0.25% on excess reserves that banks hold at the Fed.

[john]

Sorry, your right I was working on my coffee and got a little to worked up, but figure .25% of about 1.2 trillion dollars held as excess reserves. The banks are only required to hold 800 billion, but they are holding more because it is more profitable than taking a risk lending it to the private sector. The point is, they are making money for nothing with the help of the feds off our backs.

[raised eyebrow]

Pfenninger - if your assumption is correct, you must then ask WHY a bank would try to collect extra voluntary money across what is likely to be thousands of mortgages.

Guesses to the why:
1. They are using them as interest free deposits through some loophole.
2. They are using it as a hedge for future delinquencies of the mortgage holder. If the mortgage goes delinquent in the future, they can draw on the escrow reserve to reduce their losses.

[Scott Pfenninger]

I was wrong in my assertion that escrows are not balance sheet items - FFIEC Reports of Condition and Income instructions - http://www.fdic.gov/regulations/resources/call/crinst/callinst2010_sep.html - specify under Schedule RC-E page 3 that escrow funds should be reported as deposits.

So, it should function exactly like money in your checking account. It would be free funding to the bank. To follow the math, the extra $80 per month invested in Fed funds at 20 bps would get the bank an extra penny per month, right? $0.16 per year for that $80?

Also, if you have your mortgage set up on biweekly payments, your bank likely holds the first biweekly payment in the same escrow-like manner until they get the second payment to make a whole monthly payment on the loan. In effect, you are giving the bank free money for two weeks every month. In return, you get to make an extra payment per year with no extra thought or effort.

[Randal G Freeman]

A solution to this nonsense is to bank with a solid bank. One that never took a dime in TARP money, pays today 0.747% interest on checking accounts, and does not escrow for taxes or insurance. Full disclosure: I'm a shareholder of completely modest size, do all my checking there, and have a mortgage from them. Hudson City Savings Bank. Oh -- and they have never sold a mortgage. They just portfolio them.

[Areyoukiddingg]

Chase decided to increase my monthly escrow payment by $941 out of the blue. Tax rate hadn't changed, Quicken Loans screwed up the escrow when the loan closed. And it wasn't voluntary; they foreclosed.

[Jacques le Fou]

Would somebody please for (God's/Allah's/The Buddha's/etc.) sake look up the definition of "begs the question" and realize that it means "avoids the question" and not "raises the question?"

[Jessica]

Mr. Freeman, you mentioned that your escrow payment was also raised. Could I contact you to hear more about your experience? You can reach me at (212) 416-2665. Has anyone else seen their escrow payments disproportionately raised?

[Steve]

My payment increased over $125 without warning (I'd have to check my statements for the exact amount) which I did not have notice until I received a "late fee" on my next statement for not paying my total amount due for the prior month. The explanation was that my taxes had increased, which raised the requirements for my impound account. My situation was similar in that my taxes had gone up (approx. $50 a month if I remember correctly) but that did not equate raising my bill by over $125. I was also told by the Bank of America rep that they could "apply" to have the "voluntary" excess of the increase removed. I was put on hold, and after a short period of time, told that they would modify my payment to reflect only the amount of my tax increase. The bad part was, I was still responsible for the roughly $100 late fee because my payments are automatically set to be sent from my bank to BofA and I rarely open the statement since I have a fixed interest rate. I imagine there has to be hundreds of thousands of others out there who were hit with the same "voluntary cushion" increases when their taxes went up only a fraction of what the bank charged... Luckily I caught mine in time before the fees really began adding up.

[Randal G Freeman]

Jessica -- You are asking the wrong person. My mortgage doesn't have an escrow account attached to it. The bank just requires and trusts that I will that I keep current the property taxes and insurance premiums.