Got a mortgage forbearance? Seems like a relief. But watch out for the normally escrowed taxes after the forbearance is up.
The CARES Act made forbearance on federally backed mortgages available for the asking. But no one talked about the escrow portion of the skipped mortgage payments.
Federal guidance urged servicers to offer easy ways to pay the skipped principal and interest payments after forbearance but seems to have skipped any discussion of a timeline for making the lender whole for escrowed taxes due during the forbearance.
So, if you need a forbearance, make a plan for the escrow shortage.
What are escrow items
If your lender or mortgage servicer collects property taxes and/or homeowner’s insurance along with your loan payment, those are escrow items.
In essence, the servicer collects monthly a slice of funds that are paid out only once or twice a year, but are required to keep the taxes paid and the home insured. The servicer pays them when due, on your behalf.
Escrowed taxes after forbearance
At the end of the forbearance period, the payments skipped remain due. But, there’s no single way that the details of the repayment will be handled. The skipped payments may simply be due at the end of the loan. The loan may be modified. The rules may change yet again.
But what seems clear, now, is that the skipped escrow payments may be due far sooner than the principal and interest accrued during the forbearance. Local taxing agencies won’t wait to collect skipped property taxes until the end of the loan.
Existing law gives the lender/servicer the right to increase the escrow portion of the future payments to recapture the missed escrow payments.
The standard period for recapturing escrow shortages is to add one/twelfth of the total escrow default to the monthly payments for a year. Fannie Mae and Freddie Mac have instructed servicers to extend the period for paying the escrow shortfall to 60 months. Even with a 60 month repayment plan, your monthly payment increases.
Keep escrow in mind
The issues arising in the COVID-19 emergency and the multitude of different kinds of home loans make this subject complicated and not subject to a single, simple answer.
And whatever guidance we have now may well be upended by the next legislative remedy that governments and lenders propose.
The takeaway is to be mindful of the escrow portion of the payments missed in any forbearance, and to ask questions about how any deferral or modification affects escrow shortages.
Or, if your circumstances permit, set aside the escrow portion of your regular monthly payment each month of the forbearance, so you can pay that amount at the end of the forbearance.
How to tell if your mortgage is backed by Fannie or Freddie.
Fannie and Freddie have online look up tools that need only the property address and the last four digits of your Social Security Number to perform a search.
• Fannie Mae: http://www.knowyouroptions.com/loanlookup
• Freddie Mac: https://ww3.freddiemac.com/corporate