A loan modification is designed to alter the terms of a loan, such as a mortgage, so that borrowers can continue making monthly payments and the lender does not have to foreclose. The process leading to a loan modification can take several months, including the application, negotiations, review and trial period. The process includes many steps since lenders must ensure that the modification will actually make them money. The escrow account is an important part of this transition.
Escrow accounts are used by lenders to pay off costs associated with a mortgage. Lenders collect extra money from borrowers each month and store it in the escrow account. When property taxes or property insurance comes due, lenders use these funds to make the payments so that the homeowners do not have to worry about them. Escrow accounts are a constant guessing game for lenders as they try to assess the future costs of taxes and premiums and prepare for them.
Capitalizing the Escrow Account
In some modifications, the escrow account will be capitalized into the mortgage balance as part of the process, or financed as part of the principal owed, either increasing or decreasing the total debt. If there is a shortage, the shortage may be added to the principal to eventually collect on it as the new terms are created. If money is left over, it may be used to reduce the principal in the same step. This capitalization process requires detailed information on the escrow account, so the modification department may need to wait after requesting escrow information.
Finalizing an Escrow Account
Certain lending standards will require an escrow account as part of a modification, even if one was not required before. This occurs because the borrower has shown he may be a financial risk and the lender wants to manage as many parts of the mortgage as possible. In this case, a request for escrow could mean that the lender is creating an escrow account for the mortgage and is waiting for the necessary fee information.
Lenders perform regular escrow analysis to ensure that the amounts in the accounts are as accurate as possible. They review past fees and the possible progression of future trends and set new amounts to collect each month from the borrower. If this analysis is being done when the modification occurs, the lender must wait until it is finished to update the account. Lenders may conduct analysis as a natural step in the modification process.