COLUMN OF KNOWLEDGE

Mortgage Lender Errors Cost Homeowners Millions Annually

By Tammy Franklin
How often do you really look at your mortgage statement when it arrives? Do you only check to see if your payment was received, not looking at the balance from statement to statement?

If this sounds like you, you’re not alone.
People often feel too busy to be bothered with analyzing their mortgage statements, but by not paying attention, they may be giving their lenders permission to rob them.

Audits conducted in the past 15 years have shown shockingly high error rates on some mortgages, particularly adjustable rate mortgages (ARMs). Often these errors go unrecognized by the borrower, who ends up paying thousands of dollars more than what he or she owes.

The ARM was born after rising interest rates caused the S&L crisis of the 1980s. Unlike a fixed-rate loan in which interest payments remain the same over the life of the loan, the ARM is adjusted to reflect changes in the prime rate. Since the prime rate is also used to determine what was paid to depositors, the lender was protected against losses associated with changes in interest rates.

The lender is insured. But who is looking out for the borrower? Not your bank.
Audits in the late 1980s found more than $15 billion in erroneous overcharges to ARM borrowers. The error rate was as high as 50 percent in some cases.

An error of one-half a percentage point on a $95,000 loan will result in $400 being overpaid on a mortgage every year. Left uncorrected, this error will quickly add up to thousands of dollars in overcharges in only a few years. The majority of miscalculations are errors made in the lender’s favor. When a mistake is discovered, the average refund is approximately $1,500. Nearly one-third of refunds exceed $3,500.

While lender undercharges do occur, they are much less frequent. Lenders are required to refund an overcharge; borrowers are not required to pay back a loan undercharge. This is why lenders have no interest in examining a mortgage unless they’re forced to.

Why are ARM errors occurring? Each adjustable rate mortgage has its own individual terms. Some can be quite complex and require frequent adjustments. Each time a mortgage is bought and sold, there is an opportunity for data entry and computer errors. The most common errors are made by employees using the wrong numbers or applying them incorrectly.

Common mistakes include 1. Improper allocation of payment between interest and principal 2. Mistakes in original loan set up 3. Use of incorrect margins 4. Use of the wrong index and 5. Miscalculation of payment amount.

Most lenders will only correct those errors brought to their attention. They won’t go back and settle with all borrowers.

ARM lenders aren’t the only ones facing potential mortgage errors. Overcharges to escrow accounts are estimated to affect as many as 60 percent of all mortgages. More than 70 percent of all home equity loans contain overcharges.

So what can you do as a homeowner to check your lender’s processing of your mortgage? You should have your loan reviewed – adjustments, transactions and all — by a mortgage auditor.

Homeowners can also protect their investment by accelerating their mortgage to reduce the amount of mortgage interest they pay their lender.

Remember, lenders are in the business of making money. How much of your money will you let your lender keep? I don’t know about you, but I work hard for my money, and I want to ensure I am paying only what I have to.

Looking at the state of our economy and the fact that you may have to work until age 70 to receive any Social Security (don’t bet on this), you owe it to yourself to find out if you have been overcharged on your mortgage.