History of Escrow


...there is a reason for escrow

Escrow is a legal process designed to protect the interests of both parties to a change in ownership, or title.

An intermediary exists, commonly referred to as an "Escrow Agent," who is trusted to assure that all parties to a transaction are performing as required.

The performance requirements are a composite of demands each party to the transaction has placed upon the other in order to achieve the desired outcome - commonly an exchange of ownership (property title) for "consideration." (usually, money!)

Thus, a traditional escrow officer will accept money (or "consideration") from a buyer - and then insure that the property being purchased from the seller meets the expectation of the buyer... as well as the claims of the seller.

Conversely, the escrow officer will also make sure no transfer of title occurs until the buyer has tendered all payment(s) into the escrow account.

At the close of escrow, the escrow company manages the title transfer and remits funds to all parties that sold the property.

Escrows were originally institutionalized in the United States as "mortgage payment escrows" during the Great Depression (1930's) as a vehicle to protect the interest of homeowners.

Many homeowners were losing their homes when it was time to pay property taxes each year. Because it was hard to save a large sum of money for annual property taxes in those days, lenders agreed to collect 1/12th of the anticipated taxes due, along with the mortgage payment, each month.

This "forced savings" spread the total tax payment into smaller, more easily digested amounts over a period of twelve months.

The accounts into which these amounts were deposited were the forerunners of modern day mortgage escrow accounts. Then, in 1934, the Federal Government mandated that lenders manage escrows on all FHA insured mortgages. Eventually, this became the standard practice for every real estate transaction.

The word "escrow" is derived from the Middle English word "escrowl" - meaning "scroll." Other variants include the Anglo-Norman term "escrowe"… or the French term "escrowe." All terms translate to "scroll" which, essentially, infers a checklist.

It is a matter of record that throughout history, buyers and sellers have employed "trusted third parties" to hold title and payments until such time as all parties had fulfilled their obligations. So the escrow concept is nothing new to the world of commerce.

It is also a matter of record that in many cases the "trusted third parties" turned out to be, decidedly, NOT trustworthy. As a result, today's escrow officer must fulfill a number of steps to be licensed for escrow. They must have significant escrow experience (5 years in California) and a track record, undergo substantial investigation, have assets that comply with state escrow laws, post bond, and carry insurance to fulfill the role of Trusted Third Party and be awarded a license to practice Escrow or obtain an Escrow Agent or Escrow Officer certification.