Q & A : Homeowners to Benefit From New HUD Rules
Many people with low down payment and government mortgages are in for a welcome surprise. The Department of Housing and Urban Development recently demanded that mortgage companies change the way they account for funds in escrow “impound” accounts used to pay taxes or insurance.
The result of the change is that millions of homeowners will receive one-time refunds averaging $250 each, HUD Secretary Henry G. Cisneros said in announcing the change. And they may receive additional refunds later.
Who should expect refunds? When will they arrive? How will you know how much you’re entitled to? Some answers.
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Q. What exactly did HUD do?
A. It created national guidelines for lenders who establish accounts to pay property taxes and insurance bills on behalf of homeowners. In the past, there were two methods used to account for these funds--single-item accounting and accrual accounting. HUD said only accrual accounting, which requires that smaller reserves be held in the escrow account, be used.
Additionally, the government agency will require lenders to send a clearly written statement to all customers with escrow accounts. These statements will delineate how much was taken into escrow; how much was paid out, and how much was left as a cash cushion. The new escrow statements will be mailed out once a year and will also include projections of the next year’s expenses.
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Q. Why was the change made?
A. Because many consumers have complained that lenders were keeping too much of their money in escrow. Indeed, industry experts noted that some banks would hold cash cushions equal to as much as eight months worth of escrow payments. This was advantageous to the lender; escrow funds usually pay little or no interest and consequently can provide a cheap source of money for the bank. But it was an obvious disadvantage to consumers who lost the use of hundreds--even thousands--of dollars for the life of their mortgage.
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Q. Does everyone with a mortgage have an escrow account?
A. No. However, more than half of the nation’s homeowners do. Anyone who has a government mortgage--an FHA or VA loan--is required to have an escrow account. Even when it is not required, many people like escrow accounts because they are convenient and provide a way to spread out big annual payments for property taxes and insurance.
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Q. How will I know if I’m due a refund under the new rules?
A. Your next annual statement should show exactly how much “cushion” your contract allows and how much is actually in the account. If the amount in the account is more than $50 above the allowed amount, the lender is supposed to promptly send you the difference.
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Q. What do I do if my lender doesn’t send the refund?
A. First, complain to the lender and demand that it sends the money. If it refuses, contact the consumer affairs division of your local district attorney’s office. Most have lawyers specifically assigned to handle escrow cases, according to HUD officials.
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Q. You said that in addition to an immediate refund, I might get a second refund later. Why?
A. If you have an established mortgage escrow, the first refund amount would simply be for any cash cushion amount that exceeds the new guideline--specifically, an amount equal to no more than two months worth of payments.
A second refund could be due if there’s an overage in your account because of the change to accrual accounting versus single-item accounting. However, lenders are allowed three years to phase in the new accounting method, so this refund could come substantially later.
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Q. When do all these rules go into effect?
A. For new mortgages--those closed after May 24--everything is effective immediately. On older mortgages, the only immediate change is that lenders will have to provide the new, clarified statements sometime this year. They’ll have up to three years to phase in compliance with the additional regulations.
