Behind Adjustable Rate Mortgages

The History ARMs and the Errors Who Love Them

More than fifty years ago Mr. William Double, an assemblyman in the Wisconsin State legislature won approval for a new type of mortgage. This new form permitted lenders to adjust the rate charged to borrowers after a fixed period of time.  This strategy was employed as a way to offset the risk incurred by many savings and loan institutions that held large numbers of fixed-rate loans in an environment of increasing interest rates. That loan variation was the forerunner of today's variable or adjustable rate mortgage (ARM). 

In the early 1970s, some of the larger lenders in California introduced variable rate loans and, by the early 1980's, this concept in lending was gaining wide acceptance across the country. Over the years, many lenders have added refinements, improved features and designed loan products that not only fit their needs for protection against interest rate volatility, but which also meet the cash flow constraints of borrowers. 

The advantages of ARMs are obvious. In return for a lower initial interest rate, the borrower faces the possibility that future rates will increase. While the interest rate can often exceed the comparable rate on a fixed-rate loan, the borrower will oftentimes realize significant savings in the early years of the loan. Because they have been very popular since the 1980's, ARMs now account for millions of loans used by homeowners to purchase a home or to refinance an existing mortgage. ARMs are especially attractive for home buyers planning to stay in their home for a short period, say, three to five years, and for purchasers who might qualify for a larger loan than they could otherwise obtain. 

The Difference between ARMs and Fixed Rate Loans

Since the key difference between ARMs and fixed-rate loans is that the rate can change at different intervals in the future, it is not surprising that homeowners pay a lot of attention to the new rates charged by their lender. What is surprising is that, before 1985, homeowners with an ARM often never questioned the accuracy of the changes in their new rate as calculated by their lender. 

Prior to 1985 most homeowners mistakenly assumed that the payment changes calculated by their lenders must be accurate. Unfortunately, that was not, and still is not always the case. In fact, independent surveys conducted since by Forensic Loan Audit experts since that period indicate that errors occur in approximately one-third of all ARMs. In subsequent years, mortgage industry and government studies have confirmed the original findings and the extent to which these errors in the calculation of ARM payment rates exist. 

The Types of Errors Found in ARMs

The calculation of ARM rate changes is complex and errors can occur in a variety of ways. For example, a borrower can be overcharged if the payment was based on: selection of incorrect index value, type or date; incorrect mathematical rounding procedure; incorrect monthly payment factor; incorrect margin or general mathematical errors; mistyped data, computer software or ambiguous loan note. 

In fact, a simple miscalculation of just one-half of one percent in the index value, coupled with incorrect rounding can easily add $100 to the monthly payment, or $1,200 on an annual basis. Even with a sophisticated computerized system, clerical errors can occur when the data is initially entered. Errors can occur in any mortgage, but particular attention should be paid if the loan has any of these characteristics: the loan was sold or transferred to another lender; the loan was written before 1986; a rider, handwritten changes or irregularities exist in note; an unusual index or interest rate is determined by complex calculations; the loan balance has not decreased as expected; the original lender is now out of business.
 
Now that you are familiar with adjustable rate mortgages and how errors can occur, you can see how a loan modification attorney can assist you in determining if your mortgage has been correctly calculated by your lender.