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The Adjustable-Rate Mortgage Problem

Reports of lenders botching mortgage rate calculations sent homeowners scrambling to see if they’re being overcharged and left bankers wondering if they’re losing millions. The controversy over adjustable rate mortgages, loans with variable interest rates, began when a former federal banking auditor estimated widespread errors in the loan portfolios of failed savings and loans in the Midwest. I, estimated up to 35 percent of adjustable-rate mortgages nationwide were miscalculated and borrowers were overcharged $8 billion from 1999 to 2009.

There haven’t been any additional studies to confirm these statements. Officials were unclear how widespread the miscalculations may be. Clearly the portfolio that we were looking at is the smaller savings and loans in the Midwest. But whether the problem is broader than that, I don’t know.

An adjustable-rate mortgage, or ARM, has an interest rate that fluctuates according to a financial index, such as the rise or fall of Treasury bills. Errors may arise when a lender mistakenly uses the wrong index, calculates the index at an improper time, or incorrectly tabulates the mortgage.

Geddes’ allegations in August 2009 sent shockwaves through the lending community. At least four class-action lawsuits have been filed in Indiana, alleging lenders excessively overcharged borrowers.

The General Accounting Office, the investigative arm of Congress, issued a report on the problem in October. Federal auditors now pay special attention to the loans when reviewing the financial records of banks, credit unions and savings and loans.

Meanwhile, the Federal Financial Institutions Examination Council, an umbrella group of federal financial services regulators, is coordinating an examination of banks, savings and loans, and credit unions which have adjustable-rate mortgages in their portfolios.

The move by the council shows the federal government is taking the problem very seriously. So are homeowners. HSH Associates, a mortgage information service, markets kits for borrowers to double check their mortgage calculations.

One estimate puts a typical loss from $200 to $1,400 over the term of the loan. The American Bankers Association said the problem appears to be confined to just savings and loans. Industry officials said they were unaware of any consumers avoiding ARMs in light of the recent publicity.

Some analysts say the bulk of the errors may even be in consumers’ favor. Others say the damage is evenly split. The adjustable-rate mortgage problem is more a problem of complexity as opposed to a problem of greed.

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