Lenders are increasingly asking that borrowers pay one-twelfth of their property taxes each month as part of an increased mortgage payment. This really bothers borrowers in California where it is illegal to require impounding on loans less than 90 percent loan-to-value. They have never had to do it before and now feel abused that someone is asking them to do so. Not sure what an impound account is? Keep reading.
The latest wrinkle is that lenders are charging extra if they do not wish their taxes impounded. They typical charge a one-time charge of ¼ point, $1,000 on a $400,000 loan. Another, more positive way of looking at this is that if rates are normal, agreeing to a loan without an impound account, you get an incentive payment of $1,000 for being willing to do so.
This fascination with property taxes seems unusual but there is a good reason for it and thus it’s worthy of further study.
Lenders have the right to foreclose on a property if the loan goes into default, typically because of delinquencies in monthly payments. But not paying property taxes is also an “event of default.” If property taxes become delinquent, the lender steps in, brings them current, and then files a notice of default to begin foreclosure proceedings. As an owner, you don’t want to have them do that. It is not in their best interest to let this happen either.
Now, I’m sure that you, noble reader, always pay your property taxes on time, but a fairly serious number of people do not. How many? Historically it runs about ten percent and it may be worse these days.
Remember also that most lenders who accept payments are really “servicers” who collect payments for someone else. Their servicing contracts provide what they are supposed to do. Big lenders may service 10,000,000 loans. If ten percent don’t pay,
that’s 1,000,000 letters they have to write and follow-up on. And they have to do it again in another six months.
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You would have to have a pretty big department to handle this problem. I don’t know who many people it takes to keep after 1,000,000 borrowers, but I’m assuming it’s a lot. And remember these days, these same servicers have their hands full with foreclosures and seriously delinquent borrowers. They do not want one more set of problems. Perhaps more critical to them is that they do not get paid extra for chasing borrowers who are delinquent on their tax payments unless the home goes into foreclosure.
For that reason many lenders will require, in states that do not prevent them for doing so, that they establish an escrow account for borrowers. In some states it is known as an impound account. They calculate one-twelfth of the annual tax payment and add that amount to your principal and interest payment. When the taxes are due, the lender then makes the payment out of the accumulated reserve account. Ultimately this is cheaper for them than chasing the deadbeats who don’t pay on time.
In the old days when you could earn interest on your money in the bank, many people resisted because it would cost them some interest. These days, you earn less than one percent interest, so it’s not like it’s a profitable deal. At one percent, you earn a mere $10 per thousand dollars in the bank– and you have to pay income taxes on that income.
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Using the figures in my example, I cannot fathom why someone would pass up $1,000 in savings so he could earn that interest.
Finally, having dealt with many borrowers in this situation, I would have to say that most peoples’ objection to the impound account is that they just don’t like someone telling them what to do. If that’s you, try to get over it and figure out some fun thing to do with that $1,000.
Image by Diana Parkhouse, via Flickr