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Mortgage company calculations of escrow payments come under scrutiny


DALLAS -- Bill Harrison of Fort Worth learned the hard way the hazards of tangling with his mortgage company.

Convinced the company was charging him too much in escrow payments, Mr. Harrison withheld from his monthly mortgage payment the amount he believed he was being overcharged.

That led to a long-running dispute, which was finally resolved in Mr. Harrison's favor. A happy ending? Not quite.

"After all that, I got a letter from a credit-rating firm saying they were putting on my credit report that my mortgage payments had been late," Mr. Harrison recalled ruefully.

When it comes to unhappiness with a mortgage company, Mr. Harrison certainly isn't alone. When a local newspaper reported on escrow account problems in San Antonio last year, more than 300 homeowners with similar gripes called the Texas attorney general's office.

"I think people are mad at their mortgage companies in general," said Assistant Attorney General Craig Jordan, whose office is involved in a multistate lawsuit challenging the way mortgage companies calculate escrow payments.

"It's an issue that hits people close to home. . . . It's not like having a dispute with Sears over your credit card bill."

Industry defenders say such assertions are out of line. While they concede that problems and complaints exist, they argue that the extent of homeowner discontent is way overstated.

"I don't see widespread dissatisfaction out there," says Larry Temple, general counsel for the Texas Mortgage Bankers Association. "Out of hundreds of thousands of mortgages in Texas, only a fraction of a percentage of complaints come up."

Adds Betsy Martin, a spokeswoman for Citicorp Mortgage Inc., the nation's largest mortgage servicing firm: "We feel that our customers are satisfied with the way we service our mortgages and that the vast majority of consumers find escrow payments to be a convenience."

Nevertheless, mortgage company practices -- particularly in the area of escrow accounts -- currently are under scrutiny in Congress and the courts. The result could determine how those escrow payments are figured and whether homeowners are entitled to earn interest on their escrow accounts.

Lenders have used escrow since the 1930s to ensure the taxes and insurance on a mortgaged home are paid each year, thus protecting their investment from loss and guaranteeing they won't end up in line behind the local tax collector in a foreclosure proceeding.

Besides assessing a monthly amount based on a pro rata share of the annual insurance and property taxes, the mortgage company also can legally charge the homeowner an escrow "cushion."

Designed to make up the shortfall should the homeowner fall behind in payments, escrow cushions since the 1970s have been limited by law to the equivalent of two-months' escrow payments.

So far so good. The rub comes in the way the cushion is figured. Virtually all mortgage companies use a complex method called single-item analysis to compute escrow payments.

Critics say homeowners pay too much escrow under this method. Instead, they argue, mortgage companies should use an even more complex method known as aggregate analysis, which would result in a lower monthly mortgage bill.

Alan B. Morrison, director of litigation for the Ralph Nader-founded group Public Interest, recently testified before Congress that single-item analysis -- also known as "fully accrued" accounting -- leads to "substantial" escrow overpayments.

"We in our office referred to it by a term that rhymes with accrued -- but that more accurately describes what was happening to the homeowners," Mr. Morrison told Congress.

Melvin Goldberg, an assistant attorney general for the state of New York, estimates that of $20 billion currently being held in escrow accounts in the United States, $3 billion to $4 billion represents overcharges.

Mr. Goldberg contends that many mortgage contracts --

including some written by the Federal National Mortgage Association -- authorize no cushion payments at all. He complains that the Department of Housing and Urban Development, which enforces federal laws relating to escrow payments, has failed to enforce the laws in the best interests of the consumer.

However, Mr. Temple of the Texas Mortgage Bankers Association said single-item analysis is legal under existing laws. Furthermore, he said, even at current rates of escrow collection, mortgage companies are often shortchanged by homeowners on tax and insurance payments.

"With the escalating costs of insurance and with escalating taxes, more frequently than not, there aren't enough funds in the account to make the payments when they come due," Mr. Temple said.

And in recent congressional testimony, John C. Weicher, HUD's assistant secretary for policy research and development, argued that single-item analysis is easier to perform, lowering the cost of servicing mortgages and, presumably, the cost of borrowing money.

Mr. Weicher also said forcing mortgage companies to pay interest on escrow funds -- something now required in only 13 states -- may be pointless. The additional costs would simply be passed on to the borrower, he said.

Ms. Martin of Citicorp agreed. "The [profit] margins in the mortgage servicing business are very thin as it stands," she said, "and we think that it is likely that if mortgage servicers are required to pay interest on escrow, you could see a rise in the cost of borrowing."

Still, in an effort to win court sanction for a more consumer-oriented approach to interpreting escrow laws, New York, Texas and a handful of other states are suing GMAC Mortgage Corp. in federal court over that firm's escrow practices.

"A good strong ruling from a federal court will be a really useful tool for us as we try to get the industry to comply," said Mr. Jordan of the Texas attorney general's office.

Negotiations are now being held to settle the case out of court. GMAC officials declined to comment, citing the pending nature of the case.

On another front, the Senate Governmental Affairs Committee and a subcommittee of the House Banking Committee recently held hearings on mortgage industry practices.

Staffers for both panels said it's too early to tell whether the hearings will result in tougher enforcement of the existing mortgage escrow laws -- or in the passage of new legislation.

HUD already is providing relief in one area of concern to homebuyers. A new rule requires that borrowers be notified when their mortgage is sold to a new servicing company. Officials hope that will erase the confusion that sometimes exists in an era where mortgages and mortgage service contracts routinely change hands two, three and four times during their lifetimes.

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