We have a loan that is delinquent (by 330 days) and it is pending foreclosure. One of the borrowers died, so it's tied up in the court, etc.

We paid the borrowers property taxes last year, which brought their escrow balance in the negative (by $4,400).

Their analysis is schedule to run tomorrow, so of course it will reflect a hike in their monthly payment (which we won't matter anyway because we're not getting payments).

Their homeowners insurance is also due on 2/28, which we cannot pay because the escrow account is negative.

So, my question is this....is the right way to handle a situation like this to let the insurance expire and force place after the expiration date, or do we still have some sort of obligation because the loan is set up for escrow?

This is the first time this has happened, so I am clueless.

Escrow rules are suspended for loans that are greater than 30 days past due.

Thank goodness.

On a related note, if the borrower has a negative escrow balance (which was ultimately b/c we paid taxes and/or insurance), can we clear the negative escrow balance and add it to the loan balance? If so, are there any notification requirements?

In that case you have to follow the escrow guidelines in 3500.17.

When you escrow you take some risks but you are still obligated under the regulatory requirements of RESPA.

I believe its .17(k) that addresses shortages.