Your largest investment…is probably your home mortgage. The largest investment most people make is their home mortgage, but after it is made, it is usually put in a file and forgotten. When was the last time you looked at your mortgage? You’re not alone…it’s pretty dull reading. Do you know any of its history?
In the early 90’s, short term interest rates shot up dramatically! Forcing Banks and savings & loans to pay higher rates on Depositor Savings!
Financial Institutions were still obligated to honor lower long term rates on fixed mortgages…profits declined dramatically!
Instead of making profits, many savings & loans became insolvent – Resulting in the S & L failures of the 80’s!
In 1989, John Geddes, a regulator with the FSLIC, testified before a Congressional Task Force.
7,000 Adjustable Rate Mortgages (A.R.M.’s) were audited.
Errors were found in about 50% of these home mortgages.
The potential overcharges were estimated to be up to $15 Billion!
Mr. Geddes’ findings made news!
Changing Times Magazine
"Here’s a Scary Thought…The financial institution that handles your Mortgage may find your Adjustable Rate Mortgage more confusing Than YOU do. Such is the belief of a chorus of critics who are finding errors."
The Boston Sunday Globe
"Catching lenders' mistakes in mortgages"
The New York Times
"Borrowers urged to carefully monitor mortgage bills to prevent misbillings."
"Do You Know Where Your Mortgage Is?...Your original lender probably sold it, and that's when problems start."
Gannet News Service
"Mortgage Escrow: Are you paying too much?"
The National Public Accountant
"Government Study concludes 50%-60% of all Adjustable Rate Mortgages contain errors."
The Wall Street Journal
"Mortgage Holders may actually be paying more than they should because the lenders may have miscalculated periodic adjustments in monthly payments."
Other Institutions Were Obligated
To investigate Mr. Geddes claims. All confirmed widespread errors made by Mortgage Servicing Companies, other government agencies were pressured to investigate the claims of the federal regulators and the press concerning the widespread errors. These agencies included:
Resolution Trust Corporation
Office of Thrift Supervision
National Credit Union Association
These agencies confirmed through their own audits, that with more than 12 million A.R.M.’s in circulation, borrower overcharges were estimated at $15 Billion. In 1993, this figure was raised to $23 Billion. Today, the estimated borrower overcharges are approximately $50-$60 Billion.
Homeowners please consider this: An error of one-half a percentage point on a $95,000 loan will result in $400 being overpaid on a mortgage…each and every year. Left uncorrected, this error will quickly add up to thousands of dollars in overcharges in only a few years.
Most Errors Are Loan Overcharges
Average borrower refund is $1,500 +.
21% of refunds range from $3,500 to $10,000.
13% of errors are in excess of $10,000.
Why are these errors occurring? Personnel performing these adjustments have been found to:
Sadly, the personnel making these adjustments are usually the lowest paid, lease trained and most inexperienced employees in the lending institution.
And there are other reasons.
Simple "Bona Fide" human error
Computer data entry errors
Clerical or calculation errors
Each time a mortgage is bought and sold, there is the opportunity for data entry errors as well as computer error…although computer error is rare. The most common errors are made by poorly trained humans simply using the wrong numbers or applying them incorrectly.
What kind of errors are made?
Improper allocation of payment between Interest and Principal.
Incorrect factors in calculating payment.
Incorrect application of interest rate caps.
Mistakes in original loan set up.
Incorrect Index Value selected.
Failure to adjust in some years.
Faulty Index look-up methods.
Use of incorrect margins.
Improper rounding methods.
Miscalculation of payment amount.
Use of incorrect loan balance.
Use of the wrong Index.
Lenders have no financial incentive to audit mortgages.
If the lender becomes aware of an overcharge, they are obligated to issue a refund.
If the lender finds an undercharge, they cannot collect the funds from the borrower.
A typical S&L holds over 10,000 mortgages. Auditing these mortgages would cost the lender approximately $1.5 million.
Most lenders continue to correct only those errors brought to their attention. "…They won’t go back and settle with all borrowers. They’re not going to give money away if they don’t have to." Laurence Powers (Partner of John Geddes)