I need some clarification. Example, purchase loan, taxes paid on semi annual basis, total tax bill $4000.00, taxes due May ($2,000) and December (2,000), loan closes during March, 1st payment in May, seller paying May taxes. Escrow account computation year May 04 through April 05, we want 2 months cushion. Is it appropriate to take the total amount of taxes due annually ($4,000) and divide by 12 and apply $333.33 as payment in to escrow, or are you only allowed to take the 1/2 (due in December) ($2,000) and divide by 12 and apply $166.66 to escrow?

You can only inflow for what is going to outflow in the next 12 months. You can only apply a cushion to what your total outflows are going to be. Therefore, you can only have 2 months of $2000 (or 1/2 of taxes).

Thank you. I have a hunch that several loan officers have done this wrong in the past. What are the ramifications of that?

I had a few people email asking for clarification, so I'm going to answer their questions here. 24 CFR 3500.17(d)(1) requires lenders to use "aggregate accounting" when calculating escrows. If you read this 3500.17(d)(1)(i)(A) it states (in part) "The servicer first projects a trial balance for the account as a whole over the next computation year. . ." Section (d)(1)(i) also says: "the target balances may not exceed the balances computed according to the following arithmetic operations:" Therefore, if the entire year of taxes is not coming out, you can't escrow IN for them.

Let's assume taxes are $1200 per year ($100 per month). If only 1/2 of taxes is coming out, then you will only have $600 to pay out. If that is true, then I can only inflow $50 per month.

One person emailed and said that if you do this, you are going to have a shortage next year. This is correct. HUD has addressed this in past memo's and labeled this "Payment Shock." Here's how we address this topic in our Advanced Lending Manual:

Payment Shock
"Payment Shock" is when a borrower’s escrow payment will increase substantially in the second year (because the second half of taxes do not appear in the next twelve months or the tax assessed value will substantially increase) resulting in a considerable increase in the required escrow payments. The rule encourages that servicers provide borrowers with a notice explaining that they anticipate disbursements from the escrow account to increase substantially after the first year. Under the rule, the borrowers may make voluntary over payments in anticipation of the increase. Again, this disclosure is not required, but only suggested.

Here's a sample notice we suggest you use:

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The below signed mortgagor(s) is/are aware, that my monthly escrow payment has been temporarily set up at an amount less than the estimated full 1/12 of the total annual escrow disbursements. This may result in the possibility of a deficiency and/or shortage in the escrow account at the time of the next annual escrow analysis.

The reason for this escrow payment set at a lower amount is due to either the property not being assessed at its full value at the time of closing and/or the Initial Aggregate Escrow Analysis, as required by RESPA, did not include all of the annual disbursements for taxes and insurance.

In order to avoid the possibility of a substantial escrow deficiency and/or shortage and limit the increase in your monthly payment at the time of the next escrow analysis you can voluntarily deposit additional funds into your escrow account.

Please check one:

_________ The additional amount of escrow funds I voluntarily want included in my monthly payment is:

__________ $___________________ (Amount recommended by lender)

__________ $___________________ (Amount requested by borrower)

_________ I do not wish to make additional deposits to my escrow account. I realize that my escrow payment, which is included in my monthly mortgage payment, may increase substantially when the account is re-analyzed. In addition, if there is a deficit and/or shortage in the escrow account when the account is re-analyzed, I/We agree to remit to the lender the entire deficit and/or shortage in accordance with the lender’s written notification.

With the voluntary escrow payment, my monthly payment (principal, interest and escrow) will be $_________________________.

_______________________________
Borrower’s signature Date

______________________________
Borrower’s signature Date
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Generally, overages in escrow is seen as a fairly serious issue. This topic has received a lot of public attention as there has been some huge abuse in this area.

If loans loans were made with the incorrect initial escrow amounts (i.e. inflowing more than what will out flow in the next 12 months), what should we do to correct the violation at this point in time?