Gonzalez Ignites Firestorm By Seeking Escrow Interest

Mortgage bankers are lashing out at a legislative bill that would require them to pay interest on escrow accounts for borrowers' property tax and insurance payments.

The bill, introduced last month by House Banking Committee Chairman Henry Gonzalez, caught lenders by surprise. They say it has already disrupted and the market for servicing rights and will lead to higher fees for consumers.

"The bill is poorly drafted and ill-conceived," said Warren Lasko, executive vice president of the Mortgage Bankers Association of America.

Mortgage servicers place part of homeowners' montly mortgage payments in escrow, then draw on the accounts to pay tax and insurance bills. The procedure is designed to make sure the bills are paid on time.

5.25% Interest Payments

The Gonzalez measure would require annual interest payments of 5.25%.

Only 14 states now require lenders to pay homeowners interest on escrow accounts. But the mandated rates are rarely more than 2.5% a year, according to industry and legislative sources.

The Gonzalez bill, which would require interest payments on both new and existing accounts, came after complaints from several state attorneys general about lenders holding needlessly large escrow balances.

The Mortgage Bankers Association made a preliminary estimate that paying 5.25% escrow interest would cut net income on loan servicing up to 40%.

Higher Rates or |Points'

Industry officials warned that lenders would be almost certain to raise mortgage rates or upfront "points" to offset this cost. That is a threat to politicians, since some homebuyers could have a harder time qualifying for loans.

On loans already originated, lenders would have little choice but to eat the new interest cost. However, some Washington insiders said they believe the requirement on existing loans may be loosened or eliminated.

"Don't get too nervous about the chairman's legislation," Joseph Ventrone, deputy minority staff director of the banking committee, told those at a mortgage banking convention last week.

Mr. Lasko said that the bill's introduction already has clouded the value of servicing rights.

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