June, 2006
What is an Aggregate Adjustment?
In the 1000 Section of the HUD-1 Settlement Statement (the reserve or escrow deposited with lender section) there is a line item of aggregate adjustment. This is probably the least understood item that shows up on a settlement statement. There have been many cases involved in the amounts that lenders hold in escrow accounts. The laws that now exist restrict the amount that lenders can hold in escrow accounts. The law allows the lender to hold just enough to pay for the item and if the lender chooses, they can add a cushion of only two months for increases in the bills. The accounts are analyzed annually and adjusted for changes in the bills. The most common escrows are for the hazard insurance and real estate taxes although other items maybe escrowed.
If there is only one item being escrowed there is no aggregate adjustment. The anticipated bill is divided by twelve to determine the monthly amount. The number of house payments that will be made before the next bill is due is determined. When that number is determined it is subtracted from twelve and the number of months of cushion that the lender requires to be held are added. For example if the closing is held January 15th, the first house payment would be made in March. With only real estate taxes being escrowed and the final tax installment being due on September 1st, there would be six months of payments made before the installment was due. That would mean that six months would have to be placed in the escrow initially plus two months if the lender required that size of cushion. If the estimated taxes were $2,400, the monthly amount would be $200 and the initial amount placed in escrow would be $1,600. The monthly payment would add $1,200 to the escrow for taxes. Both installments of taxes can be paid with a cushion in case of an increase in the bill that was estimated in January.
When the second escrow item is added things change. If hazard insurance is added to the escrow, the same procedure is used to determine an initial individual escrow amount. With the first year of insurance paid in full and the renewal of insurance due the first part of January the following year, there would be ten house payments made before the bill was due. Two months of insurance plus the two months of cushion making a total of four months would be the initial individual deposit at closing. If the annual insurance premium was $480, the monthly amount would be $40 and the initial deposit of four months would be $160. Those figures would be entered on the appropriate lines in Section 1000.
Because we now have a multiple item escrow, a calculation of the aggregate adjustment must be made. First a year’s escrow activity is itemized without any initial deposits (Step 1). That is shown in the left hand side below. In the balance column it shows that there would be shortages with the largest being in the month of August. That figure then is used as the necessary amount of the initial escrow deposit. The middle set of figures (Step 2) shows the escrow activity with the largest negative amount as the initial deposit. The month of August now becomes zero because just enough is paid in to pay bills with no cushion. Now a two month cushion is added (Step 3) to the initial deposit shown in the right hand column and the month of August now shows the maximum that the lender can have as a cushion.
The sum of the initial individual escrows ($1,600 for taxes and $160 for insurance) that were calculated at the beginning total $1760. That total exceeds the maximum amount ($1440) that can be placed initially into the account. The difference becomes the aggregate adjustment. In this example it is $320. It is entered on the closing statement as a negative number in the 1000 section. The adjustment may be zero but it never can be a positive number. The largest adjustment is when the insurance payment is half a year away from the tax payment. If both payments come out of the escrow at the same time there is no ability to borrow from each other individual escrow, thus no adjustment. Information about the HUD-1 Settlement Statement can be viewed in the RESPA section on the HUD web site. The address is www.hud.gov.
