A New Year’s Surprise: Monthly Payments May Change

Thousands of American homeowners are getting unexpected notices from their mortgage companies that bear one of two alternative end-of-the-year tidings.

Alternative No. 1 goes something like this: Because of recent changes in federal regulations, we have reanalyzed your loan’s escrow account for 1996 and will shortly be sending you a check for the full amount of the projected surplus.

Alternative No. 2 sounds much the same except at the bottom line: Due to a projected shortfall in your escrow account under revised federal regulations, we will have to increase your escrow for the coming year, thereby raising your monthly mortgage payment.

The amounts involved vary widely. A suburban Washington, D.C., mortgage client of San Francisco-based Bank of America reports getting a Merry Christmas notice of a $1,100 escrow surplus refund heading her way. Clients of other mortgage lenders, however, are receiving very different news: By the new federal standards, their accounts don’t contain sufficient escrow funds, requiring an extra $50 to $100 in payments a month, despite a fixed interest rate on the mortgage.

These notices--good tidings and bad--are part of a major transformation underway in the home loan industry. Whether you end up getting a check--or perhaps hearing nothing at all--depends on who owns or services your mortgage.

Here’s what’s happening. Earlier this year, the federal Department of Housing and Urban Development put into effect new escrow guidelines for mortgage lenders nationwide. An estimated 35 million American home loans include monthly escrows for property taxes, hazard insurance and other charges. The idea is to accumulate funds over the full course of a year to pay these large items on a timely basis.

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Home mortgages originated on or after May 24 must use HUD’s new guidelines in computing escrow charges. The rules allow mortgage companies a phase-in period until Oct. 27, 1997, for loans originated before that date. But many mortgage lenders and servicers have decided to make the switch far in advance of the deadline.

Some of the biggest firms, with hundreds of thousands of home loans in their portfolios, have begun converting to the new escrow rules in recent months. Hence the rising tide of unexpected notices and letters to homeowners, explaining how the changes will affect them in the coming year.

Under the rules, your lender or loan servicer can require monthly escrow contributions equal to one-twelfth of the total property taxes, insurance premiums and other expenses anticipated next year. Your lender can add a “cushion” on top of the total escrow bill equal to two months’ worth of payments. This is to protect the lender against surprise increases in any item--your local tax rate, for example.

At some point during the year, your account balance should drop to no more than the cushion. That’s because all anticipated bills have been paid, leaving nothing but the cushion. HUD’s new regulations also mandate the use of a nationally uniform method of computing escrow amounts--one that not only is easier to explain on annual disclosure statements but that should result in lower escrows for many borrowers.

For a minority of mortgage customers, however, the new rules will result in higher escrow charges. That’s because before adoption of the revised federal guidelines, the lender may have collected a smaller cushion than the two-month standard or may have used a computation method that resulted in low escrow balances.

Maggie B. Norris, senior vice president of loan servicing for Charlotte, N.C.-based First Union Mortgage Corp., said her firm has begun switching its 518,000 mortgage customers to the new system. Although many homeowners are getting refunds because of the rules, she says, “sometimes we are the bearer of bad news” about escrow increases caused by rising taxes or the computation change.

Larry Costello, a spokesman for PNC Mortgage Corp., Vernon Hills, Ill., said his firm also has been converting its 460,000 customers to the new system--producing mixed responses from borrowers.

“Some customers question what’s going on here,” Costello says. “They think it’s strange that they’re suddenly getting a check.” Others, of course, aren’t happy to hear that the monthly payment will have to go up.

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The big firms adopting the new federal rules in advance are attempting to smooth customers’ feathers with explanations of the changes, including month-to-month projections of the coming year’s flow of funds in and out of escrow.

That detail can be eye-opening. For example, a Maryland homeowner, who asked not to be identified, received not only a refund notice but a monthly projection containing what she believes is an error in her favor. Her lender is apparently using a one-month cushion rather than a two-month, saving the borrower more than $600 in payments for 1996.

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Distributed by the Washington Post Writers Group.