Like many Americans, John Turner used to think of banks as infallible.
Although he took out an adjustable-rate mortgage on the brick, split foyer he bought in Alexandria, Va., in 1985, he'd always assumed on faith that his lender calculated the ARM's adjustments correctly.
All that changed this year. With the plethora of recent newspaper articles on ARM computation mistakes, he became skeptical about his mortgage. Last October, after hiring a mortgage consulting firm in Maryland to check the numbers, he discovered a $1,400 overcharge.
"You need to take a good close look at your loan because there's a definite potential for problems there," Mr. Turner advises others with ARMs.
Several reports at the federal level offer convincing evidence that mortgage processors make relatively frequent errors when doing ARM adjustments. One recent report by the Government Accounting Office, a non-partisan congressional agency that audits federal programs, quoted experts as estimating that 20 percent to 30 percent of ARM adjustments are improperly done.
None of those who have studied the situation say the errors were made intentionally.
"They're silly errors mostly. Based on preliminary information, this is not a massive conspiracy or anything like that," says Paul Havemann, a vice president at HSH Associates in Butler, N.J., a mortgage publishing firm.
Still, many Americans are unnerved by the prospect that their mortgage computations are being botched. They feel it's bad enough to face periodic changes in house payments without having to fret about mistakes on the part of the bank.
There are financial as well as emotional reasons to double-check ARM adjustments, mortgage specialists say. Of the hundreds of ARMs checked by Loancheck Ltd., a nationwide mortgage consulting firm based in San Diego, 60 percent of the mistakes found were overcharges rather than undercharges, says Richard Mostowy, the company's president.
Whether an overcharge is substantial depends both on the nature of the error and the size of the mortgage involved, mortgage specialists point out.
"If you have a $20,000 note and you were overcharged an eighth of a percent for a year, that's not very much money. But if you have a $400,000 mortgage, that can be a lot of money," Mr. Mostowy says.
When you get right down to it, most errors have pretty unsexy explanations. Interest rates on an ARM, pegged to some national interest-rate indicator, are supposed to adjust on a particular schedule, usually a yearly basis. The single most common error committed by lenders is adjusting the rate at the wrong time, Mr. Mostowy says.
Another common error occurs when the lender charges higher interest than is allowed, given an interest-rate cap on a mortgage. Most ARMs not only have lifetime ceilings on interest charges but also short-term (usually one- to two-year) caps.
The reality is that many Americans with ARMs would like to double-check their lenders but don't know where to begin. Many people don't even understand the basic elements of the mortgage agreement they signed when they took out an adjustable-rate mortgage, says Steven Fisher, a legislative assistant to Sen. Richard G. Lugar, R-Ind. Senator Lugar called for the GAO report earlier this year after a federal thrift industry auditor told him that ARM problems were believed to be widespread.
To get a grasp on your ARM, Mr. Fisher suggests: "Go dig out your loan documents, read them and see if you understand what you signed. Or go to your bank, savings and loan or credit union, sit down with the loan officer and see if he can explain to you what you signed."
If after doing your preliminary homework, you believe there may be a problem with your loan, it could be worth your while to get outside help, he says.
"Consider hiring an accountant or someone who is a financial expert," he says, adding that a financial expert should come with good references from others who have found his or her computations to be accurate.
Although some people with ARMs have the mathematical skill or computer software to do their own double-checking on the lender, many need some outside help to pinpoint possible errors.
At the low end of the cost spectrum, you can obtain a do-it-yourself packet to check your ARM for $3 from HSH Associates, the New Jersey mortgage publishing firm. The "Arm Check Kit" lets you calculate an ARM's rate adjustments using the same procedures as your lender or servicer. But you have to do the calculations yourself.
The kit includes a history of recent index values and instructions on where to find the ARM's index, margin, caps and adjustment dates. It also includes a work sheet to work out the numbers. If the homeowner encounters an apparent error, the kit includes advice on getting the lender to correct it.
To get an ARM Check Kit, send $3 (cash or money order only) to HSH Associates, Dept. ACK, 1200 Route 23, Butler, N.J. 07405.
For more extensive ARM-checking help, you could pay a mortgage consulting firm to do an audit of your account. Such an audit could provide you with the ammunition you're likely to need to seek a refund from your lender for an overcharge -- should you believe one is due.
One major player in the mortgage-consulting field is Loancheck, which charges $49 to audit an ARM. Write Loancheck Ltd., 7770 Regents Road, Suite 113-301, San Diego, Calif. 92122. Or call (619) 464-8874.
Another major player, which also charges $49 for an audit, is Loantech Inc., P.O. Box 3635 Gaithersburg, Md. 20885. You can telephone Loantech at (800) 888-6781.