Lack of Escrow In The Sub-Prime Mortgage Industry

Ironically, escrow is not a requirement by most lenders in the sub-prime mortgage market. The reason is simple. The majority of sub-prime loans are marketed to less experienced borrowers and loans with lower monthly payments without escrow appear more attractive and are easier to sell to them. Primarily, escrow accounts are set up to protect the lender but can be equally beneficial to the sub-prime borrower. 

Why Escrow?

What escrow does is guarantee that insurance premiums and property taxes get paid on time under the control of the lender. The loan principal and interest is collected by the lender each month along with money for insurance and taxes and is held in an escrow account. When a payment comes due during the year, it gets paid by the lender from that account. If escrow has not been set up by the lender and the borrower has unpaid property taxes that are past due, the government can be put tax liens against the property. Tax authorities can actually sell the property for the unpaid balance. And if the sale of the property is not enough to pay off the balance on the mortgage, the borrower faces financial loss as well as losing the home. Escrow will also protect the homeowner as well as the lender in case of loss due to fire or other damage.

So why don’t lenders require sub-prime borrowers to have escrow the same way they require escrow for ”A paper” mortgage borrowers? The truth is, due to the highly competitive mortgage lending market, lenders that would require escrow for sub-prime borrowers would lose too much business to those lenders that don’t require it. Consequently, many sub-prime borrowers who would actually benefit from escrow to manage their total monthly house payment are not even offered it as an option.

Failure To Escrow

Mike Calhoun, President and Cheif Operations Officer of the Center for Responsible Lending states, “It’s an upside-down world. The people you’d think need an escrow the most are not required to have them, and the people who need them the least are forced to use them.” He goes on to say that “The failure to escrow on sub-prime is an abusive practice.” Calhoun estimates that three out of every four sub-prime loans closed in the last few years have not set up escrow accounts in order to cut monthly payments - thus, making them more attractive to borrowers.

Because of the overwhelming number of foreclosures in the sub-prime home loan industry, financial regulators from Congress, the Federal Reserve, Treasury and other agencies have finally begun to do something about the lack of escrow in this sector. Guidelines have been proposed which state that lenders must disclose upfront to borrowers, that by not having an escrow, the borrower is soley resposible for timely payments of insurance and property taxes and that those payments can be substantial.

In the prime mortgage market where new home borrowers have superior credit history and less debt burden, escrow is usually a mandatory requirement. But in the sub-prime mortgage market, where escrow can actually be beneficial to first time home buyers or those without good credit history, escrow is not even an option. If you ask me, lenders have a very backwards approach to escrow requirements. For more information on mortgages, visit the experts at New Homes Central Lending.

[tag]mortgages, new home, sub-prime mortgages, escrow sub-prime mortgage, sub-prime mortgage escrow, sub-prime home loan, escrow benefits[/tag]

If you're new here, you may want to subscribe to our RSS feed.

If you would like to receive email updates to our blog, you may Subscribe to New Homes Real Estate Blog by Email

Thanks for visiting!