Do you know the danger signs that you may be overpaying on your mortgage? For example, if your property taxes and insurance haven`t gone up but the mortgage company asks for a sizable increase in the escrow payments it collects to pay these bills, your antennas should wiggle.
”This doesn`t always mean something is wrong,” says David Ginsburg of Loantech, a Gaithersburg, Md., firm that audits loans for borrowers who are unable to do the math themselves, ”but it bears looking into.”
Increases in escrow payments, sometimes big ones, are justified, as long as the calculations are done correctly, according to Ginsburg, who tells the story of a retired Florida woman who was hit with a $1,000 increase. It seems her loan was sold every year for three straight years. Each time, the new lender failed to perform a new escrow analysis, so necessary increases fell through the cracks.
But Ginsburg and other auditors say that the escrow accounts they verify for consumers are wrong 40 to 50 percent of the time. And most errors occur when a loan is transferred from one lender to another, a frequent occurrence in today`s sophisticated financial markets.
Mortgages are often packaged into securities and sold to investors. Sometimes the same loan is sold two or three times. In some cases, the original lender continues to collect your payments. But sometimes these so-called servicing rights are sold to another firm. And sometimes the servicing also is transferred several times over.
There`s nothing wrong with any of that. But when the new servicer has a whole new way of calculating escrow amounts, things often go haywire.
”Systems are far from uniform,” says Richard Roll of Mortgage Monitor, a Norwalk, Conn., auditing service, ”so things can change with absolutely no justification.”
You also want to be sure the lender is paying your tax and insurance bills on time. If you receive a notice of cancellation from your insurance company or see your house listed in the classifieds under tax sales, you can be sure something is wrong.
Another, albeit more subtle, red flag is a loan balance that isn`t going down as fast as you think it should, especially if you are sending along a few extra dollars each month. Unless you have told the lender exactly what the extra payment is for, it could be misdirected into your escrow account. But bear in mind that for the first 20 years or so, the major portion of your monthly payment is interest, so the principal doesn`t decline nearly as fast as most borrowers might think.
If you have an adjustable rate mortgage that fits into one or more of the following categories, check to make sure it is being managed properly. At the very least, you`ll have peace of mind.
– Age. Although ARMs were born in 1981, when savings and loans were first permitted to offer them, it wasn`t until the mid-1980s that lenders became comfortable with this new strain of home loans. So any ARM issued before then could be riddled with errors. ”Older ARMs are a different breed,” says Loantech`s Ginsburg. ”There wasn`t as much standardization then, and rate changes were often based on seat-of-the-pants calculations.”
”Anything prior to 1985 and you`ve got a problem,” agrees Larry Powers of Consumer Loan Advocates, another auditing service based in Lake Bluff.
”Back then, software wasn`t nearly as detailed as it is now. If a lender was computerized at all, he probably used some kind of jerryrigged program.” – Transfer. Each change in ownership, either of the servicing or the mortgage itself, creates another opportunity for error. Mistakes are frequently made when a loan is switched from one computer system to another, reports Powers.
– Failure. If your lender has been shut down, sold or otherwise taken over by Uncle Sam, there is a good chance something may be amiss with your loan. Servicing is one of the back-shop functions troubled lenders cut first to save money and stay afloat, and that only compounds the possibility for error.
In a two-year period between 1987 and 1989, John Geddes, then an auditor for the Federal Savings and Loan Insurance Corp. and now a partner with Powers in Lake Bluff, found ”one or more” mistakes in half of a batch of 7,000 loans taken over by the defunct insurance fund.
Since then, four other federal agencies-the Federal Deposit Insurance Corp., Office of Thrift Supervision, Resolution Trust Corp. and the National Credit Union Administration-have discovered error rates ranging from 20 to 38 percent.
– Index. If your payment changes are pegged to anything other than a standard measure of interest rates, you should be concerned. ”Less common indices force the servicer to perform ongoing research to ensure that everything is correct,” says Powers.
The standard indices are the six-month Treasury bill auction average;
one, three and five-year Treasury security constant maturity series; national monthly median cost-of-funds rate; national average contract mortgage rate;
and the 11th District cost-of-funds.
Less common but still acceptable are the London Interbank Offered Rate and the federal cost-of-funds rate. Anything else may not even exist, or may be so ambiguous that it contradicts itself.
Also, older loans are much more likely to carry unusual indices. Newer ones are far more standardized.
– Addendums. If your note has a rider or addendum, which lenders use to fine-tune a note that does not otherwise accommodate a loan`s parameters, beware. The more papers, the greater chance for error.
Hand-written changes and blank spaces are other sure signs of trouble. Hand-written changes are evidence that the rider wasn`t sufficient to adjust the note, so further tinkering was needed. Blank spaces allow the lender to insert terms that you did not agree to.
– Adjustments. If market rates are declining but yours aren`t, or vice versa, there could be a problem. (Adjustments often lag behind the market considerably, so this doesn`t always follow.)
Make sure your loan is not adjusted more (or less) frequently than called for in the note. Servicers sometimes opt not to alter the rate even though a change is permissible. But they should notify you of that decision. And once they skip an adjustment, they can`t make another one until the next adjustment date.
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When selling your home, some improvements pay off more than others. ”How to Get Top Dollar for Your Home” lists them and other ways to impress a buyer. Send $1.25 for each copy to Lew Sichelman, in care of this newspaper, P.O. Box 91428, Cleveland, Ohio, 44101-3428. Be sure to include a self-addressed, stamped envelope and the newsletter name.
