Escrow Analysis

An escrow analysis is the periodic review of escrow accounts, especially in mortgage lending, to confirm there are enough funds to pay for insurance premiums and taxes. It has proven to be essential in managing property-related expenses, building trust, and ensuring financial stability in the real estate industry.

The analysis calculates the monthly amount needed to cover these expenses over 12 months. The schedule for escrow analysis varies by state, as local laws govern it. Executing escrow analysis accurately and on time helps maintain a healthy financial ecosystem. 

The escrow analysis statement provides homeowners with a clear understanding of their financial obligations, giving them ample time to plan and budget accordingly. Lenders use this process to assess the financial stability of their borrowers and ensure that escrow funds are used correctly.

Essentially, it has become a key element in mortgage lending. Using tools like an escrow analysis calculator can help homeowners determine the true value of their escrow account. This process plays a vital role in maintaining a stable real estate market and protecting investments.  

Some of the important steps of the process are the following:

• An escrow account is opened and managed by a third party to hold funds and documents until the conditions of a sale are met.
• An initial analysis is conducted to determine the appropriate amount needed to fund the account, ensuring enough funds cover property taxes and insurance premiums.
• The service provider tracks escrow-related charges, maintaining accurate records to avoid penalties and ensure timely payments.
• An annual review is conducted to revise the funds collected and disbursed, ensuring the monthly payments are sufficient to cover projected costs.
• Based on the annual analysis, the borrower's monthly mortgage payments are adjusted to resolve any surplus or shortage. Borrowers receive an updated escrow account statement within 30 days of the analysis detailing changes to their monthly payments. The statement also includes the account history, the current escrow payment, the new payment amount, and the estimated payments for the upcoming year.
• The excess funds are refunded to the borrower if a surplus is discovered. In the case of a shortage, the borrower may need to make a lump sum payment or increase their monthly payments.

An escrow analysis statement typically includes three major sections:

#1 - First Section – Account History

This part shows all payments made into the escrow account, including payments made by the credit union for expenses such as homeowner's insurance and property taxes.

#2 - Second Section – Last Year’s Escrow Projection

Here, the borrower can see the difference between last year's projected and actual payments. It helps in visualizing any changes in monthly payments, whether an increase or a decrease.

#3 - Third Section – Next Year’s Escrow Projection

This part evaluates the escrow account history alongside the borrower’s current monthly payment. It determines whether the payment will increase or decrease for the coming year.

The borrower can understand their escrow analysis statement as follows:

• The statement includes the current monthly mortgage payment, which consists of the portion allocated to the escrow account.
• A summary of last year's monthly payments, showing how much was contributed to escrow.
• The total amount deposited into the escrow account during the previous year.
• The balance remaining in the account at the end of the review period, along with the total amount paid for insurance and taxes.
• A detailed explanation of how any surplus will be applied or how any shortfall will be addressed.
• A comparison between the new payment amount and the previous payment.

Let us use a few examples to understand the topic.

Example #1

In 2015, Wells Fargo reached a settlement with the U.S. Trustee Program due to mortgage servicing issues in Chapter 13 bankruptcy cases. The bank acknowledged failure to file payment change notices (PCNs) and perform timely escrow analyses. An Independent Reviewer (IR) assessed their compliance and found that while operational improvements were made, Wells Fargo initially miscalculated eligible populations for refunds. After corrections, Wells Fargo provided $88,301,336 in remediation to affected customers, with over $10,000,000 resulting directly from the IR’s findings.

Example #2

Julia, a homeowner in Old York City, has a mortgage with Yorky Bank and a separate escrow account managed by Servicer A for her property taxes and insurance. After an annual escrow analysis, Servicer A discovers a $500 shortage due to rising property taxes. As a result, her monthly mortgage payment increases from $1,000 to $1,500 to cover the deficiency over the next year. Julia is notified of this adjustment through her annual escrow statement detailing the changes.