Homeowners May Face Y2K Problems
Homeowners would do well to start paying closer attention to their mortgage statements. Most of us don’t, and that could prove to be a costly mistake when Jan. 1, 2000, rolls around.
Sources indicate that many lenders aren’t investing nearly enough money or manpower to correct potential glitches in their computer systems that could cause the computers to spit out erroneous data or cease working altogether.
“The industry has got to wake up,” says one major player, who spoke on condition of anonymity. “Everybody thinks someone else will fix this for them. Everybody’s playing ostrich.”
Not everyone shares that assessment. “From what we see,” says James Cotton of Freddie Mac, a company that exerts a strong influence over the housing finance business, “all the major players have major efforts underway.”
The year 2000 problem--”Y2K” in geek-speak--results from the fact that many computer programs allocate only two digits instead of four to the data field for “year” on the assumption that 1 and 9 are always going to be the first two digits. That is fine in the 20th century. But with the 21st century now just around the corner, if the software is not retooled, the systems will recognize “00” as 1900 instead of 2000 and begin generating inadequate or incomplete information.
Freddie Mac, which helps keep money flowing in the mortgage market by purchasing loans from local lenders and packaging them into securities for sale to investors worldwide, started working on correcting its systems in 1994, far earlier than most.
Mae and Mac Effort
With nearly 10% of Freddie Mac’s 3,300 employees assigned to the task, the huge secondary market company says it has fixed 75% of its programs and is working on correcting the other 25%.
But some industry leaders complain that Freddie Mac and its larger rival, Fannie Mae, haven’t done nearly enough to prod lenders and loan servicers into mending their systems.
The Mortgage Bankers Assn. has embarked on an ambitious but voluntary Y2K testing program with some pretty aggressive timelines commencing early next year. The effort will test transactions based on 16 core functions in loan origination and servicing and in secondary marketing.
But sources, who refuse to be quoted on the record out of fear of retribution from Fannie and Freddie, say what the industry really needs is a good kick in the backside from the two government-chartered companies, which together have their hands in more than half of all home loans in the country.
“The industry needs a great tongue-lashing from Fannie and Freddie,” said one major player.
Fannie Mae refused to speak about its year 2000 programs, but Cotton of Freddie Mac, noting that the five federal banking regulatory agencies have issued “a bunch of guidance” on the issue, says “there’s lots of awareness” in the mortgage sector.
Although it is difficult to tell which side has greater insight, a move this summer by Securities and Exchange Commission Chairman Arthur Levitt suggests that lenders probably aren’t as prepared as they should be.
Levitt, who in January asked publicly traded corporations to disclose their Y2K repair plans, was so upset over the lack of response that he wrote letters to the firms’ chief executives exhorting them to file more meaningful statements.
If the nation’s largest companies need to be prodded into action when potential problems are less than 16 months away, it’s probably fair to assume that less-well-capitalized organizations--read that as mortgage originators and servicers--are even further behind.
Indeed, even Cotton hedges his bets. While he’s “confident there’s not a real high risk of a problem,” he cautions that it still might be wise for homeowners to take some basic steps to protect themselves against the possibility that their lender’s computers may misfire.
Although the Freddie Mac official says, “I’m not personally going to do it,” he suggests that, if they aren’t doing so already, borrowers who fear the worst should start keeping copies of all the documents they receive from their lenders.
Of course, not everyone receives a monthly statement. Some folks get a little payment book with 12 coupons and receive an account reconciliation only once a year. Either way, you should check whatever documents you receive carefully and store them in a safe place.
You should always be looking for a change in direction--for instance, a loan balance that moves higher instead of lower. But you want to pay particular attention to the months of December 1999 and January and February 2000. If there’s going to be a Y2K problem, early 2000 is when it’s going to occur.
Fortunately--or unfortunately, as the case may be--if there is a collapse, it will be systemwide, so you won’t be alone. “If the system is going to fail, it’s going to fail on a grand scale,” says Cotton. “It’s not likely that only a couple of accounts will be handled incorrectly. It will be either all or nothing.”
If a lender’s system does falter, the problem is likely to be spotted immediately, the Freddie Mac official assures. “If the program thinks everyone is 99 years delinquent and begins flagging every account, someone’s going to recognize the error right away.”
And even if the lender is slow to spot a crash, Cotton adds, the various credit repositories have fail-safe “edit screens in place to prevent contamination” of their files by erroneous information.
In other words, if something out of the ordinary reaches a credit agency’s desk, the file will be suspended and the agency will contact the lender to find out what’s wrong. At least that’s the way it’s supposed to work.
Still, even with all these safeguards in place, it’s a good idea to protect yourself. Start by ordering an amortization schedule from your lender and determining exactly which payment you’re on. Then start tracking each payment to make sure you and the bank are on the same page.
Keep the Evidence
You also want to keep evidence that you’ve made payments--canceled checks, for example, or bank statements showing direct withdrawals. It’s not necessary to obtain copies of canceled checks that are not returned by your bank, at least not yet.
Remember, if there is a problem, it won’t show up until January or February 2000. And, according to Cotton, it “shouldn’t” mess up historical records.
“I said, ‘shouldn’t’; I didn’t say ‘wouldn’t,’ ” he adds, once again being somewhat equivocal. “But lenders typically back up their records, so they should be able to restore them in short order.”
Distributed by the United Feature Syndicate.
