Escrow Negative Balance - How Can That Be?

[Eran Lifshitz]

I have an unclear issue and hope you can help me to clear it up.

I have saw few examples in tapes of assets which has negative escrow balance.

How can escrow balance be negative?

If the escrow has positive balance it pay the taxes and insurance, and if it has no balance it just don't pay, isn't it?

Does the negative balance indicate that there is a unpaid taxes debt to the county (meaning, if I see debt in the county account it should be referring to the same debt)?

[Dan Deppen]

The servicer may have advanced funds for taxes or insurance.

[Bruce Lynn]

It can happen if escrow is under collected and taxes and insurance go up.

[Eran Lifshitz]

Thanks @Dan Deppen

As far as I know, usually servicer doesn't pay anything out of his pocket unless he has cash in his escrow account.

Have you ever saw a case in which they did pay out of their pocket?

[Eran Lifshitz]

It is a good pint @Bruce Lynn, thanks.

And then who did pay of this diff? The servicer?

[Bruce Lynn]

Servicer pays and then ups the contribution /collection from the borrower, either with one time payment or I've seen with about a year of catchup.  It sucks for the borrower as their payment can go up significantly over that year as the servicer trys to get them caught up....   We often see this with new built houses where taxes are collected on the lot value or partially completed house, then next year tax bill comes with the significant increase.   

[Michael Hakes]

I can confirm what Bruce says, our servicer messed our escrow up the first year big time, gave us a check saying they took too much and then later said they messed it up and we owed. 

Most servicers use past taxes to base the escrow amount so you can run I to trouble if homestead and senior homestead taxes were used and you cannot. Previous owners were seniors so paid less taxes so when they used their taxes we were under paying.

[Eran Lifshitz]

Thanks @Bruce Lynn & @Michael Hakes, it makes sense.

[Dan Deppen]

Originally posted by @Eran Lifshitz:

Thanks @Dan Deppen

As far as I know, usually servicer doesn't pay anything out of his pocket unless he has cash in his escrow account.

Have you ever saw a case in which they did pay out of their pocket?

Yes, some servicers do this. Although you the lender are ultimately on the hook for it. Usually they deduct any advances from your proceeds at the end of the month.

[Ilidio Cardoso]

@Eran Lifshitz

Very common practice.  The bank wants to make sure that taxes and insurance are paid on their collateral.   It taxes / insurance go up which depletes the funds the bank will pay for it out of your escrow.  Maybe the bank underestimated the amount that should be in escrow from the beginning . 

[Eran Lifshitz]

Thank you @Dan Deppen.

@Ilidio Cardoso - I think you missed the point here in my question.

There is no bank involved here...We are the bank as we own the note.