For the past several years there has been a strong push in the mortgage servicing industry to move borrowers to mortgage escrow accounts. A recent analysis by CoreLogic shows that currently almost 80 percent of all borrowers are paying their taxes (and insurance) through escrow accounts. This represents an increase of 900 basis points in the rate over the past six years.
However, national figures don’t tell the whole story. The CoreLogic analysis ranks states by the highest to lowest incidence of tax and insurance escrow accounts as of January 31 of this year compared with January 31, 2011. According to the analysis, every state has increased the adoption of escrow accounts over the past six years.
The states with the largest percentage increase in escrow account share during this period were California (12 percent), Michigan (12 percent), Mississippi (12 percent), Oregon (12 percent), Florida (11 percent) and Pennsylvania (10 percent). Of particular note, California is well below the average in the use of escrow accounts. That is mainly due to a practice in which escrow accounts are only allowed in certain situations, including where required by a state or federal regulatory authority and where loan-to values (LTVs) exceed certain parameters.
So, why have these national and state shifts occurred during this time frame? First, lenders have encouraged the creation of these escrow accounts to systematically collect and pay applicable county and state real estate taxes, P&C mortgage insurance and private mortgage insurance (if applicable). For the lender, it ensures the borrower is qualified with all costs including principal, interest, taxes and insurance (PITI). For the servicer, it brings stability and efficiency while lowering the risk of additional costs of managing tax and insurance delinquency. To further encourage creation of escrow accounts, lenders in many cases now charge a premium for non-escrow accounts of up to 25bp.
For the consumer, it brings peace of mind that their PITI payment will cover their total real estate obligation and that they will be automatically communicated with in the future as tax or insurance rates change over time. And saving up to 25bp on their interest rate is an attractive feature.
What’s the ceiling for this shift to escrow-serviced mortgages? If recent history bears out, it will continue to trend upwards which is good news for lenders and consumers alike.
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