In this post I'm going to discuss a sore subject for thousands of homeowners who have purchased land and/or had a new home built on it. There should be legislature passed immediately to fix the issue I am about to dive into.
Thousands of people are victims of mortgage servicing stupidity every year! When a potential homeowner purchases a NEWLY built house, the title company or home builder estimates how much the property taxes will be once the total assessment is done. Since the home is not built yet, the only thing the local government has on record is the value of the land. They asses a certain tax amount yearly for just the land. Then, you talk with your builder and decide on how to "improve" the land and build plans for the structure. The builder or title company will estimate the final or total taxes based on the planned improvements.
The unsuspecting homeowner thinks that because the mortgage they applied for is escrowed for taxes and insurance that everything is included and taken care of when they pay their monthly payments. That holds true all the way up until the mortgage servicing company receives it's first tax bill. There is a major lapse of up to 2yrs before the assessor's office actually comes out to appraise the land + the house which means the land tax is the only amount the lender is required to pay from escrow. The land alone may be taxed at $400.00 per year, where the house adds another $5000.00 to that bill each year.
Originally at closing, the lender escrowed for the full estimated amount of $5400.00 or $450.00 each month because the full amount was estimated. This gave them a total house payment of $2700.00 When that same lender pays the land bill of $400.00 they have no fail safe in their system that raises a red flag. When you reach your 1st anniversary of the loan closing, that lender will do what's called an annual escrow analysis and basically re-adjust your escrow because they have an "OVERAGE" in the account of $5,000.00. This is going to cause them to automatically send you a refund of the overage and reduce your monthly payments by $416.66 per month making the new payment $2283.34.
Going back to my original comment, the homeowner assumes they are escrowed and this must be OK. The whole process is so complex and there is so much money changing hands that it's understandable that people don't realize why or how this money has found it's way back to them and the monthly payment has gone down considerably. But even if they were suspicious enough to contact their lender to discuss it, the lender would be of no help to the situation assuring the homeowner that the tax bill was only 400.00 and it has been paid.
Now that a year has passed, it's time now for the assessor's office to play catchup to the 1-2yr old transaction. They come out and appraise the house and come up with an adjusted net increase of $5000.00 per year just like the original estimate. The terrible thing is that they backdate the taxes due for the time lapsed. At this point, things start to go downhill very quickly when the lender receives the NEW bill for $5400.00.
At this point, there is still no fail safe in the system that tells them there is a problem in the escrow account. They will pay the $5000.00 that was past due and the escrow account goes negative.
This triggers an immediate red flag and the homeowner gets a nice ransom letter in the mail with two options.
Option#1 Pay $5000.00 now
Option#2 Pay $833.33 additional each month for the next year
Option#2 is the ONLY option because they don't have $5000.00. The new payment will not be $2700.00 but $3116.66 per month because you still have to account for monthly escrow for next years taxes $416.66 plus another $416.66 over the next 12 payments to pay back to refund they mailed to you.
As you might imagine, this is quite the surprise to the person who just spent the money on new furniture and who had a tight budget on the original monthly payment and cannot afford the extra $416.66 per month on top of the original payment of $2700.00.
What a dilemma....
The Lesson here:
If at any point during the servicing of your loan you receive a check for any amount being refunded to you from escrow - make sure you don't spend it and contact the TAX Dept. for the company servicing your loan to find out ALL of the details about the refund.
Unfortunately this is still a regular occurrence. I get clients who call me once a week with this scenario and I hate giving them the dreadful news about what has taken place. Sometimes this doesn't come up until almost the 3rd year of servicing on the loan. These homeowners are asking me to help them refinance to solve the issue in many cases saying "I don't know what happened. My payment went up 350.00 and I need to get away from this lender".
I believe Title Companies and Home Builders have a responsibility to inform their clients better so they are prepared for what will most likely take place. That way, at the very least, they don't spend the money they received in the mail and won't be faced with a huge increase in payments.
That is my rant for today. I hope that this blog helps save someone from having it happen to them. If you are reading this and you are a lawmaker - Please pass some rule preventing lender's from refunding money blindly like this on new home builds. Matter of fact, don't process any escrow refunds for the first 3 years on new homes, that would solve the issue IMO.
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