DEAR BENNY: In April 2009 my son bought his first home using the $8,000 first-time homebuyer credit. It was a foreclosure property that cost $125,000. His loan was purchased by a major bank shortly after closing, and he received a coupon book stating the amount of his payments, which were slightly lower than he was expecting. He made payments of $863, on time until May 2010, which included his tax escrow.
In May 2010, he received a notice from the bank that his payments were increasing to $1,275 per month due to an escrow shortfall. Since he did not have enough income to support this higher payment, his loan became delinquent, and he received a foreclosure notice in September 2010. At that time, he contacted my husband and me and asked what he should do.
After some investigation on our part, we found that the bank had been escrowing only $138 per month because of an error on the closing documents. The tax certification listed taxes of $338 per year, but the taxes are actually $2,900. There was an escrow collected at the closing of approximately $3,200, so the 2009 taxes were paid from that, and the bank obviously knew that his taxes were not $338 per year since it had paid them in 2009. The error goes back to the title company, which was an agent for the foreclosing lender.
Does the title company or my son’s lender bear any financial responsibility for the error? The lender is trying to work out a loan modification for our son, but he is still in danger of losing the house due to all of this. Neither we nor he has the financial resources to pursue legal options, and aren’t sure if there are any grounds to recover monies. Our son has not owned a home or dealt with a mortgage prior to this, and he assumed since he was making the amount of payment that the bank instructed originally that all was well. The loan is nearly $6,000 in arrears at this point. –Beth
DEAR BETH: That’s a tough question. Most title companies (also called escrow companies in the Western states) require borrowers to sign a statement indemnifying and holding the company harmless for any errors they may have made.
Of course, our court system will generally not enforce such an indemnification agreement if the company was grossly negligent or acted in bad faith.
Clearly, your son’s lender will not be liable for the error. Although the lender paid the correct amount of the tax initially, this was most likely done by computer, without any human involvement. Banks will generally reassess the amount of escrow a borrower must pay at the end of each year.
Your title company made a mistake, which is causing your son major problems. I do not believe the company is obligated to pay the escrow difference, since your son is also negligent for not carefully reviewing the settlement statement before he signed it.
However, since it was the title company’s mistake, the title company should be willing to cooperate, and perhaps advance the funds necessary to bring your son’s loan current.
If I were the attorney representing you, I would send a strong letter of complaint to the title company, with a copy to your state’s attorney general. Also, since most title insurance companies are regulated by the state’s insurance agency, I would also copy the insurance commissioner of your state.
So that is what I suggest you do, immediately.
But hopefully this will teach your son — and my readers — a valuable lesson. Do not just blindly sign documents when you go to settlement (escrow). Typically, the person conducting the settlement puts a large number of documents before you and says, "Sign here, sign here."
Tell that person that you want to review everything first, and ask questions when you don’t understand things. And also go over each and every item on the settlement statement (called the HUD-1). It’s your money, so be careful.
DEAR BENNY: Is there any benefit to paying a "lump sum" payment at the beginning of the year for the sum (or greater than the sum) of the mortgage payments for the entire year?
I currently make extra principal payments monthly, and plan to change this to make at least my additional principal payment in one lump sum in January. However, I was wondering if there would be any advantage to making the total payments for the year (in addition to the extra principal) in January, versus leaving the money in a money market account. This mortgage in question is relatively small, and I currently keep one year’s worth of payments in a money market account for this mortgage. –Dave
DEAR DAVE: If you are currently getting less than 1 percent interest on your money market account, and are more or less financially stable, the answer is a loud yes.
Let me explain by way of numbers. Let’s say your mortgage balance is $100,000 and the interest rate is 5 percent. Let’s further assume that you pay $500 each month toward principal. The monthly interest payment (rounded up for this example) is $416. So the first month you pay $516. Your new balance is now $99,500 ($100,000 less the $500 principal).
Now the 5 percent interest is calculated on that new balance, which is $414.58. (Note: Multiply $99,500 by 5 percent, and divide by 12 to get the monthly interest.)
As you can see, the interest goes down very slowly each month.
But let’s say that you send the lender $5,000 in January, making sure that you make it clear on both your check as well as the payment coupon that this is to reduce principal. Now, instead of a balance of $99,500 in February, your loan balance will be $95,000. Interest for that month will be $395.83 — clearly considerably lower than if you only make the regular monthly payment.
Yes, it makes sense to reduce your principal by making extra payments. And it is even better if you can afford to make one lump-sum payment at the beginning of each year. In effect, instead of getting peanuts on your money market account, in my example you are in effect getting 5 percent.
DEAR BENNY: On July 30, I had settlement on the purchase of my first home. It was an FHA mortgage and the mortgage insurance premium (MIP) was financed. The upfront fee was approximately $5,500 and the monthly MIP was approximately $144. I received a letter on Sept. 18 from the bank that bought my mortgage, telling me that I would no longer be required to pay the mortgage insurance premium because it was not disclosed to me in my closing documents and that any premium already collected would be reimbursed in approximately 30 days.
I have not received any reimbursement, but my monthly mortgage bill has been reduced and does not include the MIP. When I called the lender, (the lender) told me to check with the title company or the original lender. The title company referred me to that original lender, which insisted everything was disclosed correctly and that it never heard of such a thing. (The lender) feels that my new lender made a mistake. (The lender) agreed to check on it for me, but never called me back.
Who do you think has the money? Do you think I am entitled to reimbursement of the $5,500? If so, I would definitely want to pursue this. If not, I made only one monthly premium of $144, which may not be worth the hassle of figuring out what is going on. Also, if I pursue this, (the lender) may indeed have made a mistake and I may then have to begin making the additional payments. What would you suggest? –Jenna
DEAR JENNA: Interesting; I rarely hear of a lender giving up money. I suppose you could independently — without identifying yourself or your loan account number — research the matter. Try reviewing the information about mortgage insurance premiums on the Internet; this may assist you in determining if, in fact, you are obligated to obtain such insurance.
Typically, if you do not put down 20 percent of more of the purchase price of your house, you have to obtain MIP. This protects the lender should you go into default.
My take: Don’t rock the boat, but keep the letter from your lender stating that you do not need that insurance. The lender may come back to you later, and your letter will be your best defense.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to email@example.com.
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