Vested Interest

• Lenders have a vested interest in your property, especially when they are the first mortgage holder --- the senior lien holder --- on your home loan. All subsequent liens placed against your property, such as a second mortgage or home equity line of credit, are considered junior lien holders, and their place in line is determined by the recording date of each lien. In the event of foreclosure, the first mortgage holder is first in line to be paid from the proceeds of the foreclosure auction. Junior lien holders are paid from any remaining funds, but sometimes they are not paid at all.
  
  

Exception

• There is one exception to this rule --- one that can be extremely motivating to the lender. If you do not have an impound account, and you fall behind in paying your property taxes, the mortgage lender stands to lose thousands of dollars. In the event of a foreclosure sale, property taxes jump to the front of the line and take priority over all other liens on the property. Even if your mortgage is delinquent, often banks will step in to pay property taxes to remain in the senior lien holder position. The costs and late fees will be passed on to you.
  
  

Lender Advantages

• Impound accounts are advantageous to the lenders. Many homeowners also prefer having their lender pay property taxes and insurance for them, especially if it is difficult for the homeowners to save up a large lump sum of money once or twice a year. Typically, lenders collect more than what will actually be needed to pay annual taxes and insurance. You can choose to have any remaining amount refunded to you or left in the impound account for next year's bills. The banks are able to use the funds collected in impound accounts throughout the year, interest-free. Some states require lenders to pay interest on borrowers' impound accounts. In the case of delinquent mortgages, the lender can ensure that your property taxes still get paid if you have an impound account, guaranteeing its position as senior lien holder if foreclosure becomes necessary.
  
  

After Foreclosure

• Once a lender has completed foreclosure proceedings, it will take care of paying all property taxes owed, if it fails to sell your home at the foreclosure auction, to recoup its losses on the delinquent mortgage. If the property fails to receive any bids, typically the lender buys the house back and it becomes a real estate owned, or REO, property. The bank also pays for insurance, homeowners' association dues, utilities and some maintenance expenses on REO properties.