Monitor Your Mortgage Payments for Errors
Homeowners beware.
Rapidly rising interest rates have dramatically boosted the popularity of comparatively inexpensive adjustable-rate mortgages. However, some maintain that these loans are prone to error. Unwary homeowners could find themselves paying hundreds--even thousands--of dollars too much for their home mortgages as a result.
“People tend to just trust the bank,” says Lawrence D. Powers, president of Consumer Loan Advocates, a nonprofit bank watchdog group in Lake Bluff, Ill. “They’re often dealing with big-name companies, and they just assume those companies are going to be right.”
However, with an adjustable mortgage, that could be an expensive mistake. Industry experts variously estimate that anywhere between a tenth and half of all adjustable loans contain errors. These errors, which typically crop up after the loan’s interest rate has been adjusted a few times, are disproportionately likely to be in the bank’s favor, Powers adds. The result is that, over the six-year life of the average loan, a homeowner could pay roughly $1,588 too much, he says.
Some bankers say these problems are exaggerated. Admittedly, loan adjustment problems were so pervasive in the early 1990s that banking regulators sent out rafts of memos warning banks and thrifts to get their loan portfolios in order. But now many banks have straightened up, putting in tighter controls to ensure that fewer mistakes are made, bankers say.
Still, not all banks have made progress, Powers notes.
And even those that have been aggressive about trying to root out problems still find an occasional error, acknowledges Colleen Hamm, vice president of service operations at Great Western Bank in Los Angeles. Notably, few attribute the errors to malfeasance. Instead, both bankers and consumer advocates maintain that errors are simply the natural result of having a wide variety of adjustable loan products all hooked into the same computer systems. In some cases, a single missed keystroke can cause the loan’s interest rate to be adjusted incorrectly, costing the borrower--or the bank--hundreds of dollars.
Because mortgages are frequently a family’s biggest annual expense, consumers would be wise to monitor their loans, Hamm says.
Now as Americans become increasingly dependent on adjustable mortgages, policing your mortgage is more important than ever. ARMs now account for 43% of all loans written, compared to just 16% a year ago, according to the Federal National Mortgage Assn. in Washington. Based on current loan originations, the ARM share will continue to rise, bankers say.
A variety of companies have sprung up recently to help individuals check the accuracy of their ARM loans. If the company finds an error in your favor, it typically charges you a commission that can amount to 50% of the error amount. In other words, if the bank has overcharged you $1,000, the ARM investigation firm would take $500 and you’d take $500.
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However, if you’re willing to spend some time at it and know what to look for, you can police your own loan.
That’s because there are only a handful of likely errors: Your bank can miscalculate the interest rate or payment when the loan is adjusted. Or it can miscalculate the remaining amount due. Studies have shown that nearly two-thirds ofthe errors involve interest calculations. A little less than a third of the errors involve miscalculating the balance due. Problems with miscalculated payment amounts are the third possible, and rarest, mistake.
How do you monitor the loan? If you’re smart, you start when you’re picking out a mortgage. If you’re shopping for an adjustable, you know there is a wide variety to choose from--loans that adjust monthly, annually, twice-annually and in two- and five-year increments. Loans can be tied to Treasury bill rates, cost-of-fund indexes, certificate of deposit rates and international interest rates.
When you’re considering a loan, look carefully at the terms and make sure you understand them. Ask which index will be used and where it is published--or whom you can call to find out the current index rate.
Then set up a file where you can keep the mortgage documents and periodic statements. And make a point of checking the terms of the loan each time it is adjusted. If you understand the loan and start from the beginning, monitoring your mortgage shouldn’t take more than five or 10 minutes.
Specifically, check the index rate on the day your loan adjusts, and add the index figure to the “margin.” If your loan allows for rounding to the nearest eighth of a percentage point, as most do, check to see if the number should be rounded up or down. Also look to see if the interest rate would be affected by a “cap” that limits interest rate movements.
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For instance, let’s say you have an ARM that floats 2.5% above the 11th District Cost of Funds index and has a two-percentage-point annual interest rate cap. On the adjustment date, the 11th District index is at 6.43578. You add that to 2.5 to come up with 8.93578. Your loan is rounded to the nearest eighth--any multiple of 0.125--which, in this case, would be 8.875%. But, because your previous rate was 6.5% and you have a two-percentage-point annual cap, your rate will be just 8.5%.
If you come up with something different than the bank did, call or write them and ask for an explanation. They are legally required to respond “in timely fashion,” which generally means within a month or so.
If you find a mistake in your favor, don’t expect to keep the difference. The bank is likely to catch up. And if you find a mistake against you, be aware that in California you get four years after the loan is paid off to find and protest errors.
Realize, too, that you’re not looking for a gigantic error. The average error, which amounts to more than $1,500 over time, equates to just $22 a month.
If you’ve had an ARM for some time and feel incapable of monitoring it now, you might consider hiring a loan-monitoring company.
Consumer Loan Advocates also puts out a book that helps you do it on your own. The book, which comes with form letters and work sheets, costs $19.95 plus $4.95 shipping and handling. It can be ordered through Consumer Loan Advocates, 655 Rockland Road, Lake Bluff, IL 60044. Phone: (708) 615-0024.
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Kathy M. Kristof welcomes your comments and suggestions for columns but regrets that she cannot respond individually to letters and phone calls. Write to Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.
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