How Does Forced Escrow Work?

If you thought all of your monthly house payment was going toward interest and principal on your mortgage loan, think again. Your lender may be setting aside part of your payment in an escrow account to pay your real estate taxes and homeowner’s insurance. Many lenders routinely establish escrow accounts with mortgage loans, and many borrowers like the convenience of knowing their mortgage holder will take care of making these payments. But if you elected not to participate in an escrow account and to be responsible for paying your own taxes and insurance, your lender could raise your required monthly payment amount and force you into escrow under certain circumstances.

Purpose of Escrow

Lenders don’t establish escrow accounts as a convenience for borrowers. Rather, escrow accounts are one way of making sure that the property that serves as collateral for the mortgage loan is protected by homeowners insurance and remains free of tax liens. The Real Estate Settlement Procedures Act sets limits on how much lenders may hold in escrow accounts. If the lender fails to make timely tax or insurance payments out of escrow, the lender is liable for any penalties incurred. You also must receive annual statements from your lender, showing how much money was deposited in your escrow account and how the payments were distributed. Though some states require lenders to pay interest on escrow accounts, most do not.

Forced Escrow

Though most escrow accounts are voluntary agreements between the borrower and lender, made at the time of the loan closing, some lenders will force escrow if they feel the borrower is not making the tax or insurance payments. With a forced escrow, the lender adds the additional amount needed to pay taxes and insurance to your mortgage payment. This results in a higher mortgage payment. Depending on the amount of your taxes and insurance, the amount you now owe could be significantly higher. If you fail to pay the full amount -- principal, interest and escrow -- your lender could consider you in default and foreclose on your loan.

Problems

When you take out a mortgage on a home, the lender requires you to list it as a lienholder on your homeowner’s insurance and with your local real estate taxing authority. If you fail to make an insurance or tax payment, the taxing authority or insurance company notifies the mortgage holder. In a perfect world, the mortgage holder would contact you to ask for proof that you had made the required payments. However, some lenders skip this step, make the payment themselves to protect the property, then force the borrower into escrow. In February 2011, Fox News in Dallas reported on several homeowners who were forced into escrow after as little as one late payment for taxes or insurance.

Recourse

If your lender forces escrow and you have a history of making timely payments for taxes and insurance, or if you can prove you made the missing payments and the mistake was not on your part, you may file a complaint with your state’s attorney general and/or hire a private attorney to sue the mortgage company for a refund. While your case is being pursued, you must continue to make the mortgage payments, with the escrow amounts, to avoid defaulting on your loan.

About the Author

Cynthia Myers is the author of numerous novels and her nonfiction work has appeared in publications ranging from "Historic Traveler" to "Texas Highways" to "Medical Practice Management." She has a degree in economics from Sam Houston State University.