On a non escrowed performing loan, do you force escrow or watch the tax roll yourself

Question

Take a performing first where taxes and insurance are not escrowed. Borrower pays the county and the carrier direct, has for six years, no lapse on record. Balance 74k, rate 9.25%, payment around 640. Anyone who has managed rentals gets twitchy about this kind of setup. Owners let a policy lapse in month seven of a twelve month term often enough, and it only surfaces when something burns. On a note there is no maintenance call as an early warning. The instinct is usually to have the servicer establish escrow and add roughly 310 a month to the payment. The argument against, and a good servicer will make it before you do: adding 310 to a 640 payment is a 48 percent increase to a borrower who has never missed. If the reason they are current is that the payment is affordable, forcing escrow turns a performing loan into a test. Escrow account establishment also runs into federal and state notice and timing requirements, and whether the loan documents even permit it depends on the note and mortgage, so that question goes to counsel and the servicer in writing before anything moves. The middle path is monitoring. Have the servicer run tax status and forced place insurance tracking, take the report, and only act on an actual lapse. What do people actually do on a clean non escrowed loan.

aaron_fitz10 · Answer

A 48 percent payment increase on a borrower who has paid for six years is reason enough to leave it alone. You would be creating the exact event you are trying to insure against. What does tax and insurance monitoring cost through a servicer? If it is 8 or 12 dollars a month, it is hard to see why this is even a debate.

diane_kowalski · Answer

@aaron_fitz10 it's usually cheap, the cost is that a report tells you about a lapse after it happened. A tax certificate pull might show a delinquency months after the due date depending on how the county reports, and that varies a lot county to county.

I look at raw land mostly and the tax angle is the one that actually bites. A tax lien can move ahead of a mortgage lien in a lot of states, and how the sale process works differs enough that I check the specific state before assuming I have time to cure.

marcus_hale41 · Answer

I monitor, and I set the trigger before I buy so I'm not deciding under pressure. Tax delinquency of any amount, I advance and add it to the balance if the mortgage allows advances. Insurance lapse of more than 15 days, force placed, and I tell the borrower what force placed costs them so they have a reason to reinstate their own policy.

The part people skip is reading whether your mortgage actually gives you the right to advance and recover. Older seller-carried paper sometimes doesn't. @tonyv88, does yours?

chriswalton8 · Answer

Genuinely asking, when a note buyer forces escrow, whose money funds the shortfall in year one? If the tax bill comes due in four months and the escrow has only collected 1,240, does the servicer advance it and bill me?

stephen_ok9 · Answer

@chriswalton8 yes, generally the holder funds the advance and the servicer collects it back over time or adds it to the balance, subject to what the documents and applicable rules allow. Which is why forcing escrow isn't free even when the borrower absorbs the payment increase.

I'd leave a six year clean payer alone and spend the money on monitoring. The 310 escrow line is a real risk to the thing I actually bought, which is the payment stream.

nataliehsu · Answer

From the outside this looks like the same question landlords have about whether to inspect. You either accept less information and a cooperative borrower, or you get more information and a worse relationship. I don't know which is right, I just recognize the shape.

kevin_lombard · Answer

So on a non-escrowed loan the borrower's insurance policy names the lender as mortgagee, and when the note is sold that has to be updated to me or my servicer, otherwise a claim check gets issued to whoever's still on the policy? I want to be sure I have that right. Is that automatic or does someone have to do it?

ryanmck27 · Answer

@kevin_lombard somebody has to do it, and it's the thing that gets forgotten. The servicer usually sends a mortgagee clause change to the carrier at boarding, but I'd confirm in writing that it went out and that the carrier accepted it. Same for the tax authority address so the delinquency notice reaches someone who cares.

@tonyv88, I'd monitor and leave the payment alone. Six years is a lot of evidence.

On a non escrowed performing loan, do you force escrow or watch the tax roll yourself

8 replies