Oversimplifying escrow calculations in servicing valuations can cause buyers and sellers of servicing to underestimate or overestimate their escrow balances.
This happens because the traditional method of valuation takes the “average” monthly escrow balance from the average of tax and insurance payments. One overlooked consideration that causes these averages to be misleading is that these payment frequencies differ vastly from state to state.
This volume of the Servicing Insights Series will discuss what escrow accounts are, why they are important to servicing, how to calculate them accurately, and how to determine the appropriate earnings credit to assign.
This Note is the sixth in a continuing series focusing on particular aspects of mortgage servicing valuation and modeling. The series discusses issues such as delinquencies, prepayments, risks, etc. and how a servicing model and analyst of servicing ought to approach these issues.
In this blog post, we will focus on the note “Tax & Escrows: Calculation & Impact on Servicing Values – Servicing Insights Volume 6” which covers the basics of escrow calculations and how to consider changing variables such as state laws for tax payments in order to increase the accuracy of your escrow calculations.
Servicing Insights & Strategies for Success
The series explains detailed aspects of servicing valuation & modeling for experienced mortgage bankers.
These strategies are defined by our industry veteran and author of the Servicing Insights series, Phil Laren. We are proud to make the insights from our servicing and modeling expert available through the Servicing Insights Series. Phil Laren leads the MSR services group at MCT, which provides robust software, consulting, and valuation solutions.
We are dedicated to sharing seasoned insights and strategies for success with mortgage professionals everywhere.
What Role Do Tax & Insurance Escrows Play in Servicing?
In this volume, we explain why escrows have played a key role in determining the value of servicing, how banks leverage escrow accounts to their own financial benefit, and more.
Servicing Insights Volume 6 will explore how to estimate escrow balances so that you can ensure the accuracy of your servicing valuations to prevent losses. By reviewing concepts of how state tax and insurance laws affect escrow calculation, we hope to explain why oversimplification of escrow balances has several pitfalls that can be avoided. Lastly, we will explain how the servicing model used by MCT’s MSR division takes into account all of the changing variables to ensure the most accurate escrow forecasts.
Learn all about how taxes and insurance payments affect escrow balance calculations in this easy to digest note.
“A simple average does not reflect the borrower’s delinquency likelihood and therefore the probability that advances will be necessary. Delinquencies not only reduce the expected escrow balance, but will require the servicer to advance any missing amounts to the taxing authority to maintain the lien position of the investor”
– Excerpt from Servicing Insights Vol. 6
About The Author – Phil Laren
Phil Laren has 29 years experience in all aspects of servicing, modeling, pricing, trading, negotiating, hedging, risk analysis, accounting analysis and operations.
He created the Desktop Servicing Model that has helped countless Mortgage Banking professionals make the right decisions in their servicing valuations.
In this volume he explains prepayments in servicing valuation.
Read Servicing Insights Vol. 6 – Tax & Escrows: Calculation & Impact on Servicing Values
We hope that this series of Servicing Insights will give you the assurance as a professional to weigh your risks and inform your judgments while managing your MSR portfolio.
By utilizing these valuable and practical insights, you can look forward to a measurable difference in the certainty of your servicing decisions that will impact your bottom line directly. Download, read, and learn more from our experts.
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- Servicing Insights Vol. 1 – Foreclosure Costs in Servicing Valuation
- Servicing Insights Vol. 2 – Late Fee Revenue In Servicing Valuation
- Servicing Insights Vol. 3 – Prepayments in Servicing Valuation
- Servicing Insights Vol. 4 – Appropriate Discounting Methodology
- Servicing Insights Vol. 5 – Yield & Arbitrage Theory