Companies that help borrowers look for mistakes in adjustable-rate mortgages are doing a brisk business these days as rates rise and borrowers worry more and more about paying too much on their loans.
David Ginsburg, president of Gaithersburg-based Loantech, says that business was up 40 percent in 1994 and that he expects another large increase this year. Mortgage Monitor Services of Stamford, Conn., has seen a similar increase. And Adjustment Rate Analysis Inc. in Glyndon, which opened in September, has amassed dozens of clients so far.
Business is expected to get even better this year and next, the companies say, because of the growing number of ARMs taken out last year. Unable to afford fixed-rate mortgages, many buyers turned to ARMs, which offer lower rates at first but a risk of much higher rates later.
In addition, borrowers of all types of loans may seek to review their escrow payments -- the money set aside each month to pay for taxes, insurance and other annual charges -- as the Department of Housing and Urban Development implements rules this spring that limit the amount lenders can require homeowners to pay into escrow accounts. Money magazine in its current issue advises readers to consider getting help from one of these firms.
"With interest rates going up, people feel like they really need to have them checked," said Todd Forman, chief operating officer for Mortgage Monitor Services.
And companies like Mr. Forman's are stepping up their marketing and adding services. Mortgage Monitor Services, which plans to market through real estate brokers soon, is offering kits for homeowners to check their property assessments and another to help borrowers pay off their mortgages sooner.
But some lenders and mortgage experts say the need for such services will not grow substantially in the coming year. Many of the ARMs recently issued do not adjust for several years. Most ARMs in 1994 were taken out in the last several months, so even the ones that adjust every year won't be recalculated for another year. And many will automatically adjust by the maximum amount because their initial rates were set far below the market.
In addition, even loan analysis firms agree that lenders are doing a better job at calculating monthly payments for ARMs -- in response to lawsuits, new federal guidelines, increasing consumer awareness and negative publicity. Most mistakes, they say, occur in older loans.
And even if borrowers suspect problems, many will be able to check the numbers by themselves and save the money they would have paid to an auditing firm, sometimes several hundred dollars.
"It was purported by the media to be a major problem," said Ken Gift, senior vice president at Loyola Federal. "There are companies out there that go into the business of charging major bucks to find a problem. . . . In fact, anyone who calls a reputable mortgage company, if there's a problem, that company has an obligation and a duty to review it."
A call to ARMs
Borrowers have been moving to ARMs in record numbers in the && last year as rising interest rates make fixed-rate loans too expensive for many buyers. According to HSH Associates in Butler, N.J., about half of all loans in the second half of 1994 were ARMs.
Rates on ARMs -- which are recalculated periodically, usually every year but sometimes every month -- are set by taking an index, such as the one-year Treasury bill, and adding a profit margin, often about 2.75 percent. In contrast, principal and interest payments on fixed-rate loans are set for the term, although monthly payments can vary because of changes in escrow charges.
Most errors involve the index: sometimes the wrong index is used; at other times the wrong dates are used to set the index; and occasionally numbers are rounded off or entered into a computer incorrectly.
Consumer Loan Advocates, a nonprofit mortgage auditing firm in Lake Bluff, Ill., last year surveyed about 14,000 ARMs across the United States and discovered errors in about half of them. Among these errors, about two-thirds were overcharges, ranging from $50 to more than $30,000 -- with an average of about $1,500.
(Of course, this means that of all loans surveyed two-thirds were either correct or had errors that benefited the borrower.)
Several banks, including Banc One, Citibank and First Nationwide Bank, have settled class-action lawsuits over overcharges. Citibank settled a $3.26 million suit in 1993 with refunds to 20,000 customers.
According to Mr. Ginsburg, most ARM miscalculations occur in loans originated before 1990 because lenders have been paying more attention to newer loans. Mistakes can also occur when loans are sold several times, a customer makes extra payments or lenders simply make bookkeeping errors.
A case in point
When Robert McFadden bought his $262,000 house, a modified Cape Cod in Glencoe, Baltimore County, in 1986, he financed it with an adjustable-rate mortgage with the one-year Treasury bill as the index. The rate started at 9.75 percent, with an annual cap of 2 percentage points and a lifetime cap of 5 percentage points.
Monthly payments started at $1,875. Over the years, the amount fluctuated from $1,638 to $2,500.
When Mr. McFadden received a letter from York Federal Savings and Loan notifying him of an increase, he was suspicious. As an investor who knew his way around financial matters, "I just had a feeling it hadn't been done right," he says.
After numerous telephone calls, the bank audited the loan and discovered a mistake that could have cost Mr. McFadden $72 a month over 12 months.
"The old expression of 'let the buyer beware' really applies here," Mr. McFadden says. "I wouldn't say that ARMs are a gamble, but I don't recommend them for someone who doesn't follow interest rates."
Mr. McFadden again reviewed the loan and felt something else was amiss: "I caught some errors," he said. "Who knows what else may have slipped by?"
He paid about $70 to have the loan audited, but the auditing firm found nothing else wrong.
Errors can also occur on any loan in calculating escrow payments -- the money lenders require borrowers to put away each month for such things as taxes and insurance. The money is put into an escrow account, which does not pay the borrower interest.
This spring, new accounting rules take effect that limit the
money lenders can require in escrow accounts. Homeowners will also be entitled to an immediate refund if they paid at least $50 too much to their escrow accounts.
More money is overcharged on escrow accounts than ARM calculations, according to Richard Roll, president of Mortgage Monitor Services.
Generally, escrow errors occur when lenders hold on to more of the borrowers' funds -- interest-free -- than is needed. Lenders will sometimes continue to charge for private mortgage insurance even when a borrower no longer needs to pay it -- by amassing 80 percent equity in the house.
A variety of companies offer help with mortgage analyses, and some will help you recover any money owed. Adjustable Rate Analysis Inc. will check a homeowner's loan for free, but it keeps 50 percent of any money recovered. In March, the company may start to charge $100 for the analysis but rebate the fee if money is recovered.
Loantech charges $95 for a mortgage analysis and a form letter to send to the lender to help collect any overcharges. The company also sells kits for $12.95 for homeowners to check loans themselves.
Consumer Loan Advocates, which pioneered the field, has started to franchise its services so it can focus on commercial loans. CLA offers franchisees -- such as Allen Coven of Adjustable Rate Analysis in Glyndon -- a three-day seminar, manuals with contracts, government regulations and case studies, a self-tutoring computer program and ARMCHECK, CLAs analysis software. The package costs $10,000.
Generally, mortgage holders will be required to provide a copy of the mortgage note and other bank documents. The process takes between four and six weeks for a complete analysis. Auditors also provide interest rate and principal comparisons, an analysis of amortization schedules, and escrow reviews. Help with recovering overcharges varies by company.
But many homeowners may be able to do the work themselves, with the help of computer software, books and the help of their lender.
Here's what borrowers can do if they want to check their loans:
* Find the original copy of the loan agreement.
* Look for the initial interest rate and payment amount listed.
* Find the date the interest rate is set to change and how often it will change.
* Study the clause that describes how the new interest rate will be calculated.
* Pay particular attention to the index that will be used and the date from which the index rate will be applied.
WHERE TO GO FOR HELP
The following companies will check your adjustable-rate mortgage for errors.
Adjustable Rate Mortgage Inc.
(410-785-9622). Glyndon. Offers free mortgage analysis and but keeps 50 percent of any money it helps recover due to an error up to $5,000, and 25 percent of amounts above $5,000. In March, the company expects to charge $100 for the analysis but rebate the fee if any money is recovered.
Consumer Loan Advocates
HTC (708-615-0024). Lake Bluff, Ill. Charges $119 for a mortgage analysis and a book called ARM Aid, which offers advice and form letters for recovering money lost due to any error.
(1-800-888-6781). Gaithersburg. Charges $95 for a mortgage analysis and a form letter to use in resolving any errors. The company sells do-it-yourself kits for $12.95 to check for overcharges.
Mortgage Monitor Services
(1-800-283-4887). Stamford, Conn. Charges $219 for mortgage analysis and materials to help borrowers recover money lost due any error. Also offers legal services if needed.