Eight months after paying off an adjustable-rate loan on a Deltona, Fla., vacation home, Katherine Lee could not rid herself of a nagging feeling that something was not quite right.
The Baltimore resident decided to act on her suspicions by hiring the Gaithersburg, Md., loan auditing firm Loantech to check over the paperwork on the $78,900 adjustable-rate mortgage (ARM) she and her husband had obtained in 1983.
Loantech concluded that the lender had failed to correctly apply extra payments made toward reducing the principal balance. The bank had overcharged her by $3,500, and she is now seeking a refund.
Typically consumers hire loan auditors to examine existing loans. Recently, though, a growing number of ex-ARM borrowers, including the surging numbers who are refinancing out of ARMs and into fixed-rate loans, are exhuming their old mortgages, with the help of a loan auditor, for a second look.
"If you do not check it out you will never know and then that money is gone forever," said Loantech president David I. Ginsburg.
Apparently, there are plenty of junked ARMs ripe for excavation. At the beginning of the year, 75% of borrowers opted for some type of fixed-rate loan when refinancing an ARM funded by the Federal Home Loan Mortgage Corp. (Freddie Mac), a major supplier of mortgage capital for lenders.
Several loan auditing firms contacted said they find errors in a quarter to half of the loans they scrutinize.
State contract law generally dictates how long borrowers have to seek redress of an error, said John Geddes, president of Consumer Loan Advocates, a Lake Bluff, Ill., loan auditing firm. The statute of limitations runs from three to 10 years, he said.
Better yet, some legal experts believe the statute of limitation in these matters starts running from the time an error is discovered, Geddes said.
Even small errors add up quickly, Ginsburg said. For example, a lender who used an incorrect index value and then employed a rounding method other than that specified in the mortgage contract can easily overcharge a borrower $50 a month on a $100,000 loan, he said.
Loan auditor Marie McDonnell said believes she has uncovered a whole other area of ARM errors that go beyond mathematical miscues. A subsidiary of the Dime Savings Bank of New York, McDonnell charged, originated $174 million of ARMs in New Hampshire in violation of state law prohibiting negative amortization or interest paid on interest. In those cases, the principal loan balance increases instead of decreases because the monthly payment is insufficient to cover all of the interest charged so the unpaid interest is added on to the principal balance.
McDonnell, owner of the Mortgage Counselor in Orleans, Mass., said she is pursuing similar problems for borrowers with ARMs from the Dime in other Eastern Seaboard markets.
Dime Savings Bank spokesman David Totaro denied the accusation, saying the bank "continues to believe it acted properly in all respects during the time we were making residential loans in New Hampshire."
For about $100, suspicious borrowers can order a loan autopsy from any one of the auditing services that have sprung up in recent years and operate across the nation. Less expensive do-it-yourself books are also available from two of the auditing firms.
Verifying the accuracy of the interest rate calculations for an ARM starts with the mortgage note and any riders or addendums. Those documents lay out the terms of the loan, including the initial payment rate, initial payment date, initial payment amount, a schedule or rate change dates, the definition of the index used, the margin added to the current index value to determine the new interest rate, the rounding method used and the periodic and lifetime caps or floors on interest rate changes.
However, the greatest potential for lender error arises with how the interest rate changes are calculated, Ginsburg said. The rate change notices supplied by the lender provides one way to double-check the process.
Borrowers who have not saved those notices can request copies of the documentation from lenders, who are required to keep at least two years worth of those records by federal financial regulators, Geddes said.
The same information is contained in the loan payment histories accompanying the pay-off balance computed by the old lender when a borrower refinances, said Robert Fryer, a principle in LoanChek, a San Diego-based loan audit outfit.
To request a refund, Richard Roll, president of Mortgage Monitor in Norwalk, Conn., suggests writing to the lender and pointing out that the letter constitutes a "qualified written request" under the Cranston-Gonzalez Affordable Housing Act. The law, passed in 1990, gives a lender 20 days to acknowledge the letter and 60 days to correct the problem.
\o7 Lehman is a Washington, D.C., free-lance writer on real estate topics.\f7
Here are several firms that perform audits of adjustable-rate loans to determine if a borrower has been charged the proper amount: