The Mortgage Guru

ESCROW ACCOUNT BASICS

I receive many questions regarding ’escrow’ and the role of the title company during the mortgage process. Essentially the title company is an uninterested 3rd party working for both the buyer and the seller. They are obligated to follow the written instructions contained within the contract.
The title company performs the following duties to complete escrow:

• Holds the buyer’s earnest money in escrow (which is applied towards the buyer’s closing costs)

• Orders the payoff from the seller’s lender

• Discovers any liens and insures they are released or paid off by close of escrow

• Provides a preliminary title report for the buyer

• Brings taxes up to date and prorates them between buyer and seller

• Directs the funding from the buyer’s lender, receiving and returning the buyer signed loan documents to the lender

• Conducts the closing for the buyer and seller (separately), assisting them in the signing of documents

• Ensures all monies for both buyers and sellers are appropriated correctly

• Records and registers the deed

• Issues a check or wire transfer to the seller for any net proceeds from the sale

Mortgage escrow accounts are special accounts set up in which money is held to pay property taxes, fire and hazard insurance premiums, mortgage insurance premiums, and other escrow items.
Escrow accounts ensure that these items are paid in a timely fashion. They guarantee that there is always enough money to pay these bills when they are due so that the homeowner avoids the risk of lapsed insurance coverage or delinquent taxes. With escrow accounts, homeowners do not have to worry about coming up with several large, lump sum payments, each with different due dates, throughout the year.
With escrow accounts, unexpected increases are taken care of. It is the responsibility of the mortgage company to allow for possible increases in tax or insurance premiums. Mortgage companies typically cover shortages when tax or insurance payments increase. It is very common for mortgage companies to pay taxes and insurance premiums when they are due even though all the money for these bills has not yet been collected from the homeowner.
Mortgages have lower rates and down payments because of escrows. Escrows protect the interest of investors of home mortgage loans by making them more attractive and secure as investments. Escrow accounts also benefit local governments by providing a more efficient, less expensive means of tax collection.

Market Commentary
Thursday: 03/06/08 10:30 AM EST: Stocks are sharply lower on renewed worries over the credit market and the effect that a crunch would have on the economy. The move away from stocks has provided some support for the bond market and Treasuries are currently up in volatile early trading.
The economic news of the day included a couple of minor releases. The Labor Department reported that the seasonally adjusted level of initial claims for state unemployment benefits fell last week by 24,000 to 351,000. The decline was larger than forecasters were predicting after an increase the week before of 21,000 (originally reported as 19,000).
The four-week moving average, which smoothes out some of the short-term volatility, fell by just 1,500 to 359,500. However, levels remain elevated. The average weekly claims level for the year to date is 344,556. The average for all of 2007 was 322,135.
The report said that the level of continuing claims rose by 29,000 to 2.831 million in the week ending February 23 (continuing claims must be at least a week old). This was the highest reading since September of 2005. The four-week average rose by 12,750 to 2,789,000, the highest reading since October of 2005. The average weekly reading for the year to date is 2,757,750. For all of 2007 it was 2,551,231.
Despite the latest decline in initial claims, the rising trend suggests that the labor market is tightening. The report also spotlights tomorrow’s heavyweight release of the monthly employment report. Due to numerous instances of the report data surprising the markets, traders often exercise caution as its release approaches.
Later this morning, the National Association of Realtors (NAR) released its index data on pending home sales for January. It indicated no change for the month (0.0%) following a 1.2% decline in December (originally reported as -1.5%). On an unadjusted basis, the index has fallen by 20.0% since January of 2007.
The data series was first published in 2005 with data going back to 2001. The index is a measure of contract activity and the NAR asserts that 80% of contracts become sales within two months and a large portion of the rest become sales two months thereafter.
In related news, the Mortgage Bankers Association of America said today that delinquency rates, initial foreclosures, and the total of all homes in foreclosure, all hit record highs in the fourth quarter of last year. (MBAA NEWS RELEASE)
In addition to these housing indicators, stock traders were focusing on missed margin calls announced by Carlyle Capital Corp. Ltd. and Thornburg Mortgage Inc. The developments have rekindled fears that the problems stemming from poorly performing subprime mortgages will continue to erode credit flows throughout the financial world. Not surprisingly, the financial sector is spearheading this morning’s selloff in the stock market.

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