HUD draft rule could derail tough law on escrow interest.

WASHINGTON -- A new rule drafted by the Department of housing and Urban Development will reduce escrow payments for some borrowers.

But the rule will not address the hot issue that strikes fear in the hearts of mortgage lenders: whether interest should be paid on the accounts.

Mortgage servicers collect monthly payments to cover real estate taxes, insurance, and other expenses for which homeowners are liable. Presently, the services keep any interest earned.

Would Slash Servicing Profits

A requirement to pay it out to borrowers would substantially reduce servicing profits.

Opinion is divided in Washington over whether HUD's action would help or hurt the chances for a tough new law requiring payment of interest.

The chairman of the House Banking Committee, Rep. Henry Gonzalez, D-Tex., introduced such a bill last year.

The industry hopes that HUD's rule will take the wind out of Rep. Gonzalez's sails.

|No Longer a Need'

"I would venture to say that if HUD takes the leadership it should take, there is no longer a need for the Gonzalez legislation," said Warren Lasko, executive vice president of the Mortgage Bankers Association.

One Republican House staffer suggested the industry's hopes may be realized. "Once the regulation comes out, if it plays well in Peoria, then I don't think Gonzalez is going to have a leg to stand on to push the legislation," he said.

But consumer advocates felt the rule would open the door for more reform.

|A Moving Target'

Mortgage servicers would be required to calculate escrow so that a prescribed low balance is reached each year. That balance could effectively be three months' payments.

However, HUD officials emphasized the draft rule was "a moving target," and the department's policymakers, including Secretary Henry Cisneros. have not signed off on it.

The proposed rule will be published in the Federal Register by late October, one official said.

Different Treatment

The rule treats existing and new escrow accounts differently, a HUD official said. Existing accounts would have to meet new requirements as well. the official added, declining to elaborate.

Major companies such as Pasadena. Calif.-based Countrywide Credit industries are already complying with the more stringent accounting method servicers would

have to adopt.

But for others, the change in accounting would incur new operational costs, said Mr. Lasko.

Might Increase Pricing

"We operate at a lower cost because of high volume," said Stanford Kurland, senior managing director of Countrywide.

"For a banker that has a smaller margin. [the change] might increase pricing up front. It makes them less competitive." Mr. Kurland said.

In addition to earning interest, servicers also use the escrow funds to get lower loan rates from banks that compete for the escrow accounts.

Large purchasers such as Countrywide drive the servicing market, and they will not be much affected by the rule.

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