Escrow surplus

What Is Escrow Surplus?

An escrow surplus, within the context of Mortgage Servicing, occurs when the funds held in a borrower's escrow account exceed the amount necessary to cover anticipated disbursements for items like property taxes and homeowners insurance over the upcoming year, along with any permitted cushion. Mortgage servicers collect monthly payments from borrowers that include principal, interest, and amounts allocated for escrow to ensure that these periodic expenses are paid on time. When an annual escrow account analysis reveals that the actual balance is greater than the target balance plus the allowed cushion, an escrow surplus exists.

History and Origin

The concept of escrow accounts in mortgage lending became widespread to ensure that critical property-related expenses, such as taxes and insurance, were consistently paid. This protects both the homeowner and the lender's investment. The regulation of these accounts in the United States is primarily governed by the Real Estate Settlement Procedures Act (RESPA), enacted in 1974, and its implementing regulation, Regulation X, overseen by the Consumer Financial Protection Bureau (CFPB). RESPA and Regulation X set specific guidelines for how mortgage servicers must manage escrow accounts, including limits on the cushion they can hold and requirements for annual analyses and the handling of surpluses. For instance, federal regulations specify that a mortgage servicer must refund any escrow surplus exceeding $50 to the borrower within 30 days of completing the annual escrow account analysis.¹¹, ¹² These rules aim to protect consumers from excessive escrow balances and ensure transparency in mortgage servicing practices.¹⁰

Key Takeaways

• An escrow surplus means a borrower has paid more into their escrow account than was needed for property taxes, homeowners insurance, and other escrowed items.
• Mortgage servicers are legally required to conduct an annual escrow analysis to identify surpluses, shortages, or deficiencies.
• Federal regulations, primarily RESPA and Regulation X, dictate how an escrow surplus must be handled, including the timeframe for refunds.
• A surplus typically results from overestimates in the initial escrow analysis or reductions in tax or insurance costs.
• An escrow surplus of $50 or more must generally be refunded to the borrower.

Formula and Calculation

The determination of an escrow surplus involves an annual escrow account analysis conducted by the mortgage servicer. The analysis compares the actual funds held in the escrow account to the projected disbursements for the next 12-month period, plus a permissible cushion.

The core idea is:

Where:

• Actual Escrow Balance: The current amount of money in the borrower's escrow account at the time of the annual analysis.
• Projected Annual Disbursements: The estimated total cost of property taxes, homeowners insurance premiums, and any other escrowed items (e.g., mortgage insurance premiums) that are anticipated to be paid from the account over the next 12 months.
• Permitted Cushion: A reserve amount that servicers are allowed to hold, typically up to one-sixth of the total annual disbursements, or two months' worth of escrow payments as per Regulation X.⁸, ⁹ State laws may specify a lesser amount.

If the result of this calculation is positive, an escrow surplus exists.

Interpreting the Escrow Surplus

An escrow surplus signifies that the borrower has overpaid into their escrow account, leading to an excess balance. The presence of an escrow surplus is generally favorable for the borrower, as it means they are due a refund. This situation often arises when estimates for future expenses, such as property taxes or homeowners insurance premiums, were higher than the actual costs incurred, or if the borrower made additional, unscheduled payments into the account.

When a servicer determines an escrow surplus, federal regulations require a specific response. For surpluses exceeding $50, the servicer must refund the amount to the borrower within 30 days of the annual escrow statement. If the surplus is less than $50, the servicer may either refund the amount or apply it as a credit towards future escrow payments. This ensures that borrowers are not left with unnecessarily high balances in their accounts.

Hypothetical Example

Consider a homeowner, Sarah, whose annual escrow analysis is completed by her mortgage servicer.

• Her projected annual disbursements for property taxes and homeowners insurance for the upcoming year are $3,600.
• Her permitted cushion, based on one-sixth of the annual disbursements, is $600 (1/6 of $3,600).
• Therefore, the target balance for her escrow account, including the cushion, is $4,200.
• However, due to a decrease in her homeowners insurance premium this year, her actual escrow account balance at the time of the analysis is $4,450.

Using the formula:

In this scenario, Sarah has an escrow surplus of $250. Since this amount exceeds the $50 threshold, her mortgage servicer will refund the $250 to her within 30 days of sending her the annual escrow statement.

Practical Applications

Escrow surpluses primarily manifest in the context of mortgage servicing and compliance with federal regulations. For homeowners, understanding an escrow surplus means recognizing when they are due a refund from their mortgage servicer. This refund can provide unexpected liquidity for other financial needs or can simply be a welcome return of overpaid funds.

From the servicer's perspective, correctly identifying and disbursing an escrow surplus is a critical regulatory requirement under the Real Estate Settlement Procedures Act (RESPA) and its implementing regulations (Regulation X). The Consumer Financial Protection Bureau (CFPB) provides detailed guidance on how servicers must conduct escrow account analyses and handle surpluses, shortages, and deficiencies.⁵, ⁶, ⁷ Compliance ensures fair treatment of borrowers and avoids penalties for the servicer. For example, Fannie Mae's Servicing Guide, which outlines requirements for loans they back, details how servicers should administer escrow accounts, emphasizing accurate calculations and timely disbursements.³, ⁴ The Federal Reserve also highlights that violations related to escrow account requirements, including timely refunding of surpluses, are common compliance issues identified during bank examinations.²

Limitations and Criticisms

While an escrow surplus generally benefits the borrower, its existence can sometimes indicate past inaccuracies in the servicer's estimations or a lack of proactive adjustment. If a servicer consistently overestimates costs, borrowers might be deprived of the use of their funds for an extended period, even if a refund is eventually issued. This can be particularly impactful for borrowers on tight budgets.

Consumer advocacy groups, such as the National Consumer Law Center (NCLC), monitor mortgage servicing practices, including issues related to escrow accounts. They often highlight instances where servicers fail to comply with regulations, such as delaying refunds or incorrectly calculating surpluses. The CFPB itself has identified various servicing violations, including issues with escrow accounts, emphasizing the need for robust internal controls and accurate calculations by servicers to prevent financial harm to consumers.¹ Borrowers who believe their escrow surplus has been mishandled or incorrectly calculated have avenues for recourse, including filing complaints with regulatory bodies.

Escrow Surplus vs. Escrow Shortage

An escrow surplus and an escrow shortage represent opposite outcomes of the annual escrow account analysis. An escrow surplus occurs when the balance in the account is more than what is needed to cover projected expenses plus the permitted cushion. This results in money being owed back to the borrower. Conversely, an escrow shortage (or deficiency) happens when the actual balance in the escrow account is less than the amount required for anticipated disbursements and the allowed cushion. In this case, the borrower will need to pay additional funds to cover the shortfall, either as a lump sum or spread out over the next 12 monthly payments, as permitted by regulations. Both scenarios stem from the servicer's annual review of the escrow account but indicate different financial positions for the homeowner.

FAQs

Q1: Why do I have an escrow surplus?

An escrow surplus typically occurs because the estimated costs for your property taxes, homeowners insurance, or other escrowed items were higher than the actual amounts paid out of your account during the past year. It could also happen if you made extra payments into your escrow account.

Q2: How will I receive my escrow surplus refund?

If your escrow surplus is $50 or more, your mortgage servicer is required to refund the amount to you within 30 days of completing your annual escrow account analysis. This is usually sent as a check or credited directly to your loan principal balance if you choose.

Q3: What happens if my escrow surplus is less than $50?

If your escrow surplus is less than $50, the servicer has the option to either refund the amount to you or apply it as a credit toward your upcoming escrow payments. They are not mandated to issue a refund for amounts under $50, but many servicers still do.

Q4: Can I request my escrow surplus to be applied to my loan principal?

While the primary method of returning a surplus of $50 or more is typically a refund check, some servicers may offer the option to apply it to your loan's principal balance. You would need to contact your mortgage servicer directly to inquire about this possibility.