Who Is Responsible For an Escrow Mistake?

6 July 2004, Revised October 23, 2007

Lenders make mistakes in calculating tax and insurance escrows, usually innocent but sometime deliberate, to make a deal look better than it is. That is fraud, but there is no way to prove it. Moral: Borrowers should always check escrow calculations.

"Recently we refinanced our home. After making payments for a few months, they raised our payment by $350. It seems that they under estimated our escrows…If we had known that our payment would be this high, we would not have refinanced. Do we have any recourse against the lender?"

I’m not a lawyer but I doubt it. If the loan officer deliberately low-balled the escrow estimate to get you to sign, it would be fraud, but you could never prove it was not an innocent mistake. In all likelihood, it was an innocent mistake – one you should have caught.

On numerous occasions, I have scolded borrowers who were "payment myopic", meaning that they made decisions based strictly on changes in the monthly mortgage payment. People suffering from payment myopia are capable of doing really dumb things, like refinancing into a higher-rate mortgage because a simultaneous extension of the term reduces the payment.

Refinance decisions based on the mortgage payment plus the escrow payment take payment myopia one step closer to blindness. Escrow payments consist of insurance premiums on a homeowner policy you purchased, and property taxes which are set by local authorities. Refinancing doesn’t affect either, so they should not figure at all in the refinance decision.

"When I bought my home a year ago, I as told what the monthly mortgage payment would be, including taxes and insurance. The total was within my budget. Recently, however, I received a notice from the escrow company asking for an additional $165 a month for taxes. On looking into it, I discovered that this was not due to a rise in tax rates, but to a mistake the lender had made in calculating my taxes when I took out the loan! I never would have purchased the house had I known how much the tax payments would be. This was the bank's error, not mine, and I can’t afford this extra monthly payment. What recourse do I have?"

Same answer as before, the lender would not be held legally liable because mistakes happen. Besides, you should have not relied on the lender to tell you what the property taxes were, prudent home purchasers get that information for themselves.

That the $165 increase resulting from the lender’s mistake makes the loan unaffordable to you makes me wonder whether you should ever have become a homeowner? You could easily have been faced with an equally large tax increase stemming, not from a mistake but from a rate increase or rise in valuation. Such increases occur all the time. Furnaces have been known to break down the first time the purchaser tries to heat the house. The universal rule of home ownership is that you will have unexpected expenses. Those who can’t cope with that should remain renters.