Subprime and escrowed accounts

For many mortgages, property tax and insurance is escrowed and is part of the monthly payment. This protects the lender and insures everything gets paid on time. It also helps the homeowner judge what the monthly payments will be.

Guess what. These escrowed payments were generally NOT done with subprime mortgages, because “lenders who insisted on escrows would lose business to those who didn’t.”

The upshot is that borrowers who have shown themselves to be the least capable of managing their credit affairs and who are most in need of the discipline provided by the escrow system don’t have it offered to them.

It will be interesting to see how many municipalities will soon have income shortfalls because property taxes aren’t being paid. This also shows how exploitative the system was, as escrowing payments was deliberately not done on risky subprime mortgages because then it would have been even more obvious the mortgagee couldn’t afford the loan.

  • DJ

    I know it works differently in different localities, but here when a person doesn’t pay their taxes, the country auctions off the property and keeps the money. I go to the tax sale on the courthouse steps each year, and it’s quite an event. The starting bid is taxes owed, and it goes up from there. Only rarely does a property fail to sell or sell for only taxes. Typically a property is worth many times taxes owed, so the county actually gets a bit of a windfall.

    In the case of a mortgage default when taxes are owed, the lien goes with the property the bank would need to pay them after foreclosure and before reselling the property. (No doubt they would include this amount as COD or Cancellation of Debt income to the former owner.)

    In short, the county ALWAYS gets its money.

  • Good real estate info. Thanks for the read!

    As far as the real estate bubble goes, it looks worse in San Diego.
    I came across a San Diego real estate broker’s blog post that is to be the only one I’ve seen that does not spout the ‘industry line: “It’s always a good time to buy real estate.” This broker calls it like it is. No it’s not PC, but it is amazingly informative and insightful.
    Bob Schwartz, the San Diego real estate broker who publishes the blog, wrote a great article back in 2005 that predicted today’s huge home deprecation. You can read this article at: San Diego real estate the url is:

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