LERETA’s John Walsh: Higher Taxes and Insurance Will Surprise Borrowers with Escrow Accounts in 2024. Are Servicers Ready?

John Walsh is CEO of LERETA, Pomona, Calif. He leads an executive leadership team focused on providing the mortgage and insurance industries accuracy, responsiveness and innovative technology.

While homeowners across the U.S. are celebrating the record-high appreciation in their home values and, as a result, their home equity, servicers are preparing for the other shoe to drop: an accompanying rise in real estate taxes, affecting escrow balances and creating issues for both borrowers and servicers.

And it isn’t just rising home values that are likely to affect escrow accounts over the next few years. Dramatic increases in homeowners and flood insurance premiums, as well as an expected downturn in commercial real estate values in some communities that could erode the tax base could create a perfect storm for servicers and their escrow-based borrowers.

If any or all of these factors come into play, millions of borrowers will face higher monthly mortgage payments, and servicer call centers will experience higher call volumes as they deal with the coming wave of questions, confusion and complaints. In many cases, servicers will get unfairly blamed for these escrow increases based on forces beyond their control. But don’t tell that to a frustrated homeowner who’s dealing with the shock of a higher mortgage payment.

Higher taxes as a result of home price appreciation are coming – it’s only a matter of when and how soon that will affect homeowners directly. More indirect, but still concerning however, is the effect of the downturn in commercial real estate. The commercial real estate market is suffering setbacks from pandemic-induced work-from-home trends and high interest rates which are impacting both commercial real estate values and the ability for commercial real estate owners to pay their taxes. This could shift more of the tax burden to homeowners which, in turn, will result in higher monthly mortgage payments for escrow-based borrowers.

Beyond tax increases, homeowners in many states are seeing their homeowners insurance increase significantly, particularly in states that have seen an uptick in natural disasters including wildfire and flood. According to industry estimates, insurance premiums for the average U.S. homeowner are expected to increase roughly 9% this year with even bigger increases expected in 2024. In Florida, the jump is even higher with an anticipated increase in the average premium of about 66%. At the same time, flood insurance premiums are also seeing significant increases. Last year, the Federal Emergency Management Agency, which oversees the federal flood insurance program, introduced updated flood insurance pricing, known as Risk Rating 2.0.  The new pricing model eliminates flood zones and measures risk at the property level in order to reflect the true cost of the flood insurance.


Based on the latest FEMA numbers, homeowners in 11 states can expect premium increases of more than 100%, and in 29 other states the increases will range from 50% to 100%. The 18% cap on federal flood insurance premiums means the average policyholder can expect their rate to go up 18% a year for several years until they reach the full risk-based cost.

With all of these coming changes, servicer call centers and customer service resources will be strained at a time when cost containment is even more crucial. Servicers that plan for and get ahead of the coming escrow shock wave will be better equipped to handle the ebb and flow and, at the same time, minimize borrower frustration.

Anticipating significant tax and insurance premium increases as early as possible is key to mitigating some of the impact of these potential escrow adjustments. Smaller servicers that focus on a single market or regional footprint may have an advantage in terms of seeing what’s happening sooner given their in-market proximity. Larger, national servicers may consider using various forms of portfolio monitoring to identify accounts that may be at risk for significant tax or insurance increases. For example, running AVMs against properties in markets that have experienced high home-price appreciation can help project possible tax outcomes. For the millions of loans that have been refinanced over the last several years, recent valuations are available and, as such, can provide a basis for comparison against tax assessment.

Rather than waiting on annual escrow analyses to identify potential changes, servicers should consider an earlier, proactive approach. To get ahead of insurance issues, servicers may consider data mining their portfolios to flag accounts that have been or could be impacted by insurers that are pulling out of certain markets, such as California and Florida. It will also be beneficial for servicers to proactively monitor major tax legislation, such as the recent one in Texas, that could impact large segments of their portfolio.

In addition to regular escrow accounts, servicers should pay particular attention to LESA (Life Expectancy Set Aside) accounts which are typically used for reverse mortgage borrowers. Higher tax and insurance bills often pose an elevated risk based with LESA accounts, depending on how they are set up. Although LESA accounts are designed to last for the borrower’s lifetime, there can be shortfalls, and when this occurs the burden falls on the borrower which can result in increased defaults. Servicers should monitor these accounts closely to make sure that LESA set asides are still adequate, and, if not, make sure to employ an aggressive communications approach to alert homeowners to the changes. This can be particularly challenging since reverse mortgage borrowers are, by definition, older and therefore may not be as up to date as they should be on their tax and insurance bills.   

In fact, communications is a key strategy to getting ahead of the coming escrow shock wave. Beyond proactive portfolio monitoring, data mining and staying on top of pending legislation that could affect taxes, proactive communications and outreach with impacted borrowers will go a long way to reduce potential customer service headaches. And, as with all effective communications strategies, it isn’t just a one-time tactic, but rather multiple, and timely, touchpoints that will help increase the likelihood that borrowers get the message about any potential changes. This can include:

Non-borrower-specific messaging about potential pending increases on servicer websites and IVR hold messaging.

Using QR codes on borrower communications to link directly to information on pending escrow adjustments.

Updated call center scripts and protocol to equip associates with tools to address specific increase-related inbound calls as well as to prompt them to review potential escrow balance adjustments for borrowers calling for other reasons.

Detailed escrow account updated on customer statements.

Individual customized letters, emails and outbound calls alerting borrowers to pending increases and giving them the option to add to their escrow accounts earlier.

Servicers can’t control the external elements that will impact escrow accounts, but they can control how they prepare for and address these coming changes. Waiting for annual analyses may save time and resources now, but could present even bigger issues down the road. With proper preparation, strategy planning and a commitment to proactive communications, what could be an escrow shock wave could be reduced to a mere ripple.

(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)