Escrow - Prepaid Taxes

A question came up that I think I have an answer to but I wanted to see if everyone else agrees. If a customer makes a loan, and has prepaid their taxes, my guess is we should know this and base our analysis on that fact. Thus certain months would have no payment for taxes then it would start up.

If they wanted us to prepay their taxes, they would need to come up with the additional funding, in which case we would develop disclosures at that point showing the additional outlay and the lack of funding going forward (for say six months of prepaid taxes). Thus changing thier payments. Thoughts?

So if we knew they had prepaid taxes through July it would show $500 pmt for insurance as Jan through July and $1,000 (assuming taxes of $500) for August through December. If they wanted to prepay again in December we could redo the disclosures. The problem is that the disclosures would need to have two payment amounts. IE Principle and Int +insurance would be XXXXX through July and XXXXXXX from July to December.

I'm not sure what the proper way is. We have a similar situation.

We have a customer that paid their full year tax bill in January (actually due Jan and June). We closed the loan in March, first payment May but now the escrow is screwed up because in the next 12 months we will only be paying the first half taxes (Jan). The borrower will automatically be short at analysis because we weren't escrowing for a full year. This happens every once and a while and has also happened a few times on a purchase when the seller has paid the full year in advance. These are the only two options we can think of. We are not sure what the best way to go would be.

1) Wait until May, than reanalyze beginning with the July payment so that both the Jan and Jun taxes will be on the analysis, thus resulting in an increase in payment and a shortage, which we will allow them to spread over the next 12 months.

2) Issue the initial escrow statement assuming we will be paying the full year in Jan so that the constant will be correct then in Jan pay the first half only, the loan will analyze before the June disbursement is due so the account should even itself out. Right?

We let the borrower decide what they want to do and they usually chose #1. We are able to calculate the shortage and increased payment for them so they are ready to have the increased payment in two months.

Any suggestions?

This is called "Payment Shock". Here's some info I provided in the Webinar I conducted for BOL on March 2nd:

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.
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You can find more info on the webinar at the BOL Store:
http://www.bankersonline.com/bankerstore/index.php?main_page=product_info&products_id=971

David, do you think either of the options I listed are acceptable?

jroberts,

I ran into a similar issue when I tried to crunch the numbers. Basically I had to do an analysis assuming they paid as normal because I needed to find out how much of a balance was required come the January analysis. That created a headache because, in the end, they end up making nearly the same payments as before.

Another problem I ran into is that you cannot have greater than 2x cushion. But if you hold off escrows until a certain date, to make payments once you know prepayments have no longer been made, you always have more than 2x at one point. Additionally, every time you change the payment amount, it effects your beginning balance. Both numbers are on opposite sides of the equation. To sum this long explanation up, I could not get it to work.

Solution #1 is fine.
Solution #2 (if I understand correctly) is going to have too much money in the escrow account. You cannot assume they will prepay taxes again. You'll want to review §3500.17(k)(3).

Thanks....