escrow account

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escrow account

a special financial account for the temporary deposit of funds before they are paid out (or returned) at the conclusion of, for example, an insurance or will settlement or a merger deal. For example, as part of the terms of the sale of Diageo's (UK) USA food division to General Mills (USA) in 2000, Diageo transferred $642 million into an escrow account. This money will be paid out in full to GM if that company's share price ($38 at the time of the sale) is at or above $42.55c on the first anniversary of the deal. In the event, however, of GM's share price falling below $38 the money will be returned to Diageo.
Collins Dictionary of Business, 3rd ed. © 2002, 2005 C Pass, B Lowes, A Pendleton, L Chadwick, D O’Reilly and M Afferson

escrow account

(1) A separate bank account for keeping money that is the property of others. Attorneys and real estate agents are required to keep escrow accounts for client money and not commingle client money with their own funds.(2) An accounting entry by a mortgage lender showing the amount on hand from the borrower's monthly budget loan payments to pay real estate taxes and insurance when those bills become due.

The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-Hill Companies, Inc.

Escrow Account

In a home mortgage transaction, a deposit account maintained by the lender and funded by the borrower, from which the lender makes tax and insurance payments for the borrower as they come due.

Lenders generally require escrow accounts. The rationale is that it prevents a weakening in the protection provided to the lender by the property. If the taxes are not paid, the tax authority could place a lien on the property that would have a higher priority than the lender's lien. Similarly, if the house burns down or is flooded, the lender's protection goes with it if the insurance premiums had not been paid.

Size of the Account: To assure themselves that there will always be enough money in the account, lenders ask for more than they actually need as a “cushion.” In years past, many of them maintained unreasonably large cushions. To deal with that, the Department of Housing and Urban Development (HUD) issued a ruling that placed a ceiling on the size of escrow accounts, which in turn limited the amount the lender could ask the borrower to deposit at closing.

The rule is that the deposit cannot exceed the amount needed to prevent the balance from falling below an amount equal to two-
months worth of tax and insurance payments at its lowest point during the year. While HUD does not do a lot of enforcing, my impression is that all but a handful of lenders follow the HUD rules. If you want to check the calculation, I explain how to do it on my Web site, see “How Do I Figure Escrows?”

Reasons for Avoiding Escrows: The least important reason borrowers may want to avoid escrow is to capture the interest earnings on the account for themselves. The amounts involved are small. I explain how to measure the interest earnings on my Web site in “Should I Escrow?”

The more important reason is to establish control over the payments. Lenders require escrow to assure that the payments will be
made, and borrowers may want to avoid escrow for the same reason. Lenders occasionally screw up, and when this happens it can be a nightmare for the borrower. See Servicing/Recourse Against Bad Servicing.

Ways to Avoid Escrow: Most lenders will waive escrow requirements if the borrower makes a down payment of 20% or more. The logic of this waiver is that if the borrower has that much equity in the house, it is safe for the lender to rely upon the borrower's self-interest to pay the taxes and insurance premiums.

So, if you intend to put down 20% or more, let the loan officer know up front that you will not be escrowing.

If you intend to put down less than 20%, it becomes more complicated. In most states, lenders are willing to waive escrows for a fee—usually 1/4 to 3/8 of a point. However, in Washington, D.C., Illinois, New York, and Oregon lenders are barred from charging a waiver fee, which means that they may be less willing to waive escrows in those states.

If you are already escrowing, getting rid of it is not easy. You must convince the lender that it is in his interest to eliminate the requirement in your case.

If the lender is a depository institution servicing its own mortgages, your best shot is to appeal as a customer of the firm. If it isn't
too costly, depositories usually want to satisfy their customers or potential customers. Increasingly, however, loans are being serviced not by lenders but by servicing agents working for lenders.

Servicing agents make most of their money from servicing fees paid by lenders and from the interest earnings on escrow accounts. When a loan they are servicing is refinanced, however, the income on this loan ceases unless the agent is the one making the new loan. If the servicing agent understands that if you cannot terminate your escrow account, you intend to refinance your mortgage with another lender (not with him or her), you will get his or her attention. After all, it is better to lose only the escrow interest than to lose both the escrow interest and the servicing fee.

The Mortgage Encyclopedia. Copyright © 2004 by Jack Guttentag. Used with permission of The McGraw-Hill Companies, Inc.
References in periodicals archive ?
They added that in letters, penned to FBR Chairman Shabbar Zaidi, they had proposed a foolproof system in which the three stakeholders of the escrow account would keep monitoring to ensure complete transparency.
to release the proceeds in the escrow account to the developer once the prior approval of the Committee is secured.
The judge said that Blackstone's interpretation was "contrary to the obvious purpose" of the escrow account, which was to build up a fund as security for Blackstone's restoration obligations.
An escrow account refers to money held by a third-party on behalf of transacting parties.
Anwar Murad, Deputy Group CEO -- Banking at Al Salam Bank-Bahrain commented: "We are delighted to sign this agreement with Diyar Al Muharraq, assigning Al Salam Bank-Bahrain as the agent to establish an escrow account for the real estate development project.
This agreement will enable Aldar Properties to have escrow accounts for the recently announced Yas Acres, a golf and waterfront development comprising 1,315 villas and townhouses, on Yas Island.
* provide borrowers with an escrow account statement;
"Every mortgage investing institution must provide annually and at no cost an analysis of the mortgagor's real property escrow account." said Bragman.
The escrow account was established to satisfy any post completion balances due to EKF and any potential warranty claims (Escrow Account).
BANKING AND CREDIT NEWS-September 9, 2015-New Escrow accounts launched by Metro Bank
Earlier, the Finance Ministry had reportedly transferred $6 million to an escrow account within the Ak-Keme Hotel case to unlock shares of Kyrgyzstan in Centerra Gold Inc.
The Board of Selectmen "negotiated'' to get $50,000 for the town and a $25,000 escrow account for snow removal.