Vision Pro

FINANCING
The odds of errors with ARMs

By Marilyn Kennedy Melia
Special to the Tribune
Published February 1, 2004

More mortgage borrowers are in a gambling mood these days, with about a quarter of them now taking an adjustable-rate mortgage (ARM), rather than the predictability of a fixed-rate loan, according to a recent survey conducted by the Mortgage Bankers Association.

The interest rate of an ARM can move up or down, based on movements in market interest rates. So, for a break on the initial interest rate, ARM borrowers wager they won't be hit with a big jump when it's time of the rate to adjust. But some also risk being charged too much on their mortgage through inadvertent mistakes made calculating new, adjusted payments, experts say.

Consider the complicated course most mortgages follow, and it's not surprising errors can creep up: An independent mortgage broker provides a borrower with a loan that is funded by a mortgage banking company. That company may send the customer bills for the first few months, but then it sells the "servicing" of the loan to another company, which then is responsible for billing and collecting payments. Another investing company buys the mortgage, meaning that the servicer provides the investing firm with the monthly payments, after taking its cut for collecting. Because the mortgage business is notorious for repeatedly buying and selling its loan inventory, you can multiply this chain of events by two, three or more times.

Each time loans make a new landing, computer tapes are transferred into new systems to continue directing bills each month to borrowers, says Bill Matthews, vice president of the Mortgage Asset Research Institute, an industry research group in Reston, Va. "Anytime there are changes, there are opportunities for a glitch," he says.

Factor in adjustable-rate mortgages, which are governed by complicated formulas that dictate when and how interest charges change, and the probability of errors looms larger. Moreover, though all ARMs are more complicated than fixed-rate mortgages, some ARMs are more exotic than others, and the more unusual the formula, the more likely it is that it may be calculated incorrectly, Matthews says.

The rate of errors has declined over the last decade, says David Ginsburg, president of Loantech.com, a Web site based in Gaithersburg, Md., that sells software that enables lending firms to check the accuracy of their ARMs calculations, and also provides an "armcheck" service for consumers. Errors occur about 15 to 20 percent of the time, Ginsburg estimates, with about half of the mistakes resulting in consumers being undercharged and half overcharged.

Robert Wesley Brown says he knows of no company that has tried to collect from consumers on undercharges. But, when consumers discover they've been overcharged, they can contact the lender, which is obliged to provide a refund, according to Brown, president and CEO of Mortgage Analysis Computer Corp., a firm in Centennial, Colo., that audits ARMs for lending companies and consumers.

Some refunds are substantial, totaling several thousand dollars or more, Ginsburg says, with bigger refunds resulting from monthly overcharges that continue for a long period.

Borrowers who are taking out ARMs should save the contract that describes exactly how and when the loan adjusts, Brown says. Saving billing information from the lender, which details the exact amount of the monthly payment charged to principal and interest, also can come in handy if borrowers decide to go back and audit their loan or hire a firm to do it for them, Brown says.

It's the unusual ARMs, though, that are more prone to errors, Brown says. For example, some ARMs come with a payment cap, meaning a borrower's bills can rise only by a set amount, but extra interest charges can be added to the principal. Consumers should read and understand the contract thoroughly before taking a ARM, he says. Some of the popular indexes are contained in a article and worksheet, "ARM Check Kit: How to Verify Your ARM's New Rate," available free online at HSH.com, a Web site with mortgage information.

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