Companies help homeowners with ARM calculations BORROWERS DOUBLE-CHECK THE NUMBERS

January 08, 1995|By Carolyn Spencer Brown | Carolyn Spencer Brown,Special to The Sun

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

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