It Pays to Check the Math on Adjustable Mortgage Rates
Homeowners are up in ARMs these days over recent revelations that millions of adjustable-rate mortgages are riddled with miscalculations and overcharges.
Lenders across the country are facing challenges amid statistics that suggest many borrowers--including those in the San Fernando Valley and Ventura County--may not be getting a fair shake.
The Federal Deposit Insurance Corp. found that 20% of the banks and S&Ls; it surveyed made mistakes in calculating ARMs. Both the Office of Thrift Supervision and the Resolution Trust Corp. studied the same problem and discovered some sort of error in one-third of the loans audited.
These mistakes come about because of incorrect interest rates, inaccurate adjustment periods, failure to round off numbers properly or merely the oversight of a computer operator, said Lawrence D. Powers, vice president of Consumer Loan Advocates, a nonprofit auditing group based in Lake Bluff, Ill.
Last year his organization audited 9,000 clients with ARMs and found that overcharges occurred in 37% of the mortgages it audited. Over the life of the loan, Powers found, the average overcharge was $1,588.
Not everyone, of course is convinced that mortgage overcharges are such a serious problem.
Thomas Dyke, president of Canoga Park-based Guaranty Asset Management Services Corp., audits mortgages for lenders nationwide. He said most of the problem loans originate with smaller lenders outside California. “The biggest California thrifts tended to understand the problems they were going to have with adjustable-rate mortgages and created systems to deal with these loans.”
Great Western Bank, the S&L; based in Chatsworth, says that its error rate is a mere 114 out of 252,000 adjustable-rate mortgages. The lender credits itself with developing a nearly foolproof system.
But, said Richard Roll, president of Mortgage Monitor in Norwalk, Conn., “the odds are good that the practices lenders are following result in excessive charges. Often money gets misplaced.” Despite the claims by some lenders that there aren’t any problems, Roll said, “We recommend that consumers hold their lenders on a short leash.”
Red flags that may indicate there’s a problem include a mortgage that has been sold to another lender/servicer, loans based on an unusual index, mortgage forms that have blank spaces that were never filled in and loans issued prior to 1985 when computer software was less sophisticated than it is now.
And one of the reasons that it’s hard to figure out if your bank or S&L; has overcharged is that mortgage calculations vary widely. A lender can use many different indexes on which the interest rate is based. Adding to the confusion is that interest can be compounded daily or monthly, and “a year” can be 360, 365 or 366 days. Lenders also have different practices when it comes to rounding off certain numbers, or posting payments or interest rate changes.
However, borrowers are not without recourse. According to the Cranston-Gonzalez Affordable Housing Act of 1990, mortgage lenders and servicers of federally related adjustable-rate mortgages have to acknowledge a borrower’s written request for information within 20 days. Within 60 days of the written request for a recalculation, the lender must either refund money to the borrower or explain why the lender feels there was no mistake.
A statute of limitations may apply, but borrowers who have been overcharged can probably make their case for a refund.
Before approaching a lender to make any corrections, it’s important for borrowers to make sure they have made the proper calculations.
One option is to pay Consumer Loan Advocates $119.95 to do a computer printout on your loan, plus receive a 120-page book and 25-minute videotape on mortgage overcharges. Borrowers who don’t want to pay for the auditing can buy the book and tape for $19.95 by calling (800) 767-2768.
Mortgage Monitor offers similar services. Its book, Ca$h in Your Mortgage costs $4.50, plus $2 shipping, and is available by calling (800) 283-4887.
Borrowers with a knack for computers may want to double-check their lenders’ calculations on their own, said Earl Peattie, president of Mortgage News Co. in Santa Ana. “The advantage to doing it yourself is you learn how to do it. The disadvantage is that it’s very complicated,” he said. “Even people who work at the lender don’t know how the calculations work.” Peattie said that if consumers tinker with Lotus 1-2-3 or Microsoft Excel software, and add all the history of their loan, they can do their own math. Consult your local software dealer for further suggestions.
One way to at least check on whether the right interest rate is being used in your loan calculation is to get updated information. The Federal Reserve publishes a monthly publication of interest rates known as Statistical Release H.15; it’s available by calling (202) 452-3244. The cost is $15 per year.
Information on other indexes is available free, save for the price of a phone call. One commonly used index is the 11th District Cost of Funds, which changes every month and shows the Federal Home Loan Bank of San Francisco’s rated average cost of funds. (As of Aug. 31, the 11th District Cost of Funds was 5.069%.) For information about the 11th District Cost of Funds, call (415) 616-2600.
Another important index is the National Cost of Funds, and it is available through the Office of Thrift Supervision by calling (202) 906-6988. And the Federal Housing Finance Board National Average Contract Mortgage Rate for Previously Occupied Homes is available by calling (202) 408-2940.
Sometimes lenders make other mistakes. Glenfed Inc., the big S&L; that operates Glendale Federal Bank, for example, has agreed to settle a class-action lawsuit by refunding about $6.5 million to some of its borrowers whose escrow accounts were overcharged.
The S&L; has mailed letters alerting 157,000 of its borrowers that they may qualify for money back because from October, 1988, until June, 1992, it sometimes overestimated the amount of insurance, taxes and other fees that are customarily placed in escrow or impound accounts when purchasing property.
