The Escrow Trap: How Errors in Escrow Accounts Lead to Foreclosure Disputes

 Most people think foreclosure happens only when a borrower stops making their mortgage payments. However, in some cases, homeowners who pay on time still fall into default due to something unexpected: errors in their escrow account.

Escrow accounts are designed to protect both the borrower and the lender. They set aside funds to pay property taxes, insurance premiums, and sometimes other costs. When managed properly, escrow accounts help keep a mortgage in good standing. But when mistakes are made, by the loan servicer or due to system errors, borrowers can face unexpected charges, payment increases, and even foreclosure notices.
This issue can go unnoticed until it causes real harm. Borrowers, attorneys, and mortgage experts should all understand how these accounts work and how they can cause problems.

What Is an Escrow Account?
An escrow account is a separate fund maintained by the mortgage servicer. Each month, the borrower typically sends one combined payment that includes:

•  Principal and interest on the loan
•  Estimated property taxes.
•  Homeowners insurance premiums (and sometimes mortgage insurance)

The servicer is responsible for using these escrow funds to pay taxes and insurance bills on time.

To manage this process, servicers are required to perform an annual escrow analysis, estimating future costs and adjusting the borrower’s monthly payment if needed.

Common Escrow Errors
Servicers handle thousands of escrow accounts, and while many are managed properly, errors can occur and create issues for the borrower. Some of the most common issues include:

•  Undercollection: The servicer collects too little, creating a shortfall. To cover it, they may raise the monthly payment suddenly or treat the shortage as unpaid debt.
•  Overcollection: The borrower is charged too much, tying up money unnecessarily and causing financial stress.
•  Missed payments: The servicer fails to pay a tax bill or insurance premium, risking tax liens or canceled insurance coverage.
•  Force-placed insurance: If the servicer believes the borrower’s insurance has lapsed, even if it has not, —they may buy their own policy and charge the borrower. These policies are often expensive and can sharply increase the mortgage payment.
• Incorrect adjustments: After loan modifications, refinances, or property tax changes the escrow account should be re-evaluated. If not, outdated estimates can lead to future problems.

The Legal and Financial Impact
Even if a borrower never misses a mortgage payment, a misapplication of the payment can cause errors then causing the loan to appear delinquent. This may lead to late fees, credit reporting issues, or even foreclosure. In some cases, homeowners do not realize there is a problem until they receive a notice of default—, or a much higher monthly bill.

Federal regulations such as the Real Estate Settlement Procedures Act (RESPA) require servicers to follow specific rules when managing escrow accounts. These include providing annual statements, disclosing shortages or surpluses, and responding to written borrower inquiries within set timelines.
When these rules are not followed, borrowers may have grounds to dispute charges, correct errors, or take legal action.

The Role of Expert Witnesses
In legal disputes involving escrow errors, expert witnesses can play a vital role. Mortgage servicing experts can help explain:

•  Whether the servicer followed accepted industry standards.
•  How payments were applied.
•  Whether force-placed insurance or tax penalties were avoidable.
•  How escrow problems contributed to borrower harm or foreclosure.

Experts are also useful in explaining complex financial records to judges, juries, or arbitrators, especially when a case involves technical errors, regulatory violations, or actions that were or were not consistent with standard industry practices.

What Borrowers Can Do
Escrow problems are often difficult to identify until they become serious. Borrowers can protect themselves by taking the following steps:

•  Review your annual escrow disclosure each year.
•  Confirm that taxes and insurance are paid on time (you can contact the tax office or insurer directly). This can also be found online in most areas.
•  Keep a file of all mortgage and escrow-related documents.
•  Contact your servicer in writing if you notice errors or unclear changes.
•  Ask for a written explanation of any significant payment increases.

Borrowers also have the right to request an escrow account breakdown or submit a written notice of error (NOE). These tools can help get answers and fix mistakes before they lead to default.

Final Thoughts
Escrow accounts are often treated as automatic or “set-and-forget” systems, but they require close attention. Errors in these accounts can lead to missed payments, increased bills, and even foreclosure.

For borrowers, staying alert to unexpected changes or unexplained charges is the first line of defense. Reviewing escrow history and documentation may reveal the source of a servicing dispute. If the issue escalates to litigation, a mortgage loan servicing expert may be engaged to bring clarity to the matter.
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In the world of mortgage lending, the numbers matter— and so does how they are handled. Contact Jason D. Koontz today to schedule your consultation. 

This blog post was developed with significant assistance from Julie K. Miller, Research Assistant at JD Koontz, LLC.