Refinancing boom catalyzes increase in lender mistakes.

The refinance boom may be ending, but its effects will linger for some time--and surprisingly, not all are good. Overextended mortgage companies are making more and more processing mistakes that often result in costly overcharges to homeowners.

Last week, a Freddie Mac press release signaled the end of the refinance boom: "Long-term mortgage rates rise on signs of economic recovery." The after-effects of the refinancing frenzy will last for years to come, and not all are good.

Millions of Americans reduced mortgage payments and saved money over the past 36 months through refinancing, but many continue to pay unnecessary fees without even realizing it. As homeowners scrambled to refinance--industry activity totaled $1.3 trillion in 2002--mortgage companies were more than happy to oblige, but struggled to keep up. While lender delays in the mortgage application process are annoying, the increase in lender mistakes in the mortgage payment transaction process is alarming.

Time Magazine recently reported, "... as falling interest rates have pulled waves of homeowners into the refi game, an overburdened mortgage industry has been strafing them with costly errors, including miscalculated escrow payments, unneeded credit insurance and omitted special--offer discounts. Borrowers, reveling in their lower monthly payments, blithely absorb the overcharges."

There is anecdotal evidence abound to support this trend. During the mortgage settlement process more and more homeowners are experiencing forgotten discounts, botched escrow accounts, incorrect fees and charges (e.g., insurance), and simple math mistakes in mortgage contracts. Other homeowners are finding extra payments aren't being posted correctly, regular payments are being lost, escrow items are being double paid or not paid at all, and variable rates are not being calculated correctly.

For example, one recent American Mortgage Auditing customer faced foreclosure when it was discovered the lender had overpaid his taxes by $7,000 in just three years. Another customer faced a delinquency until it was discovered the lender had lost several mortgage payments.

Stories like these are common. Lenders may send statements to the wrong address so borrowers never know their escrow or P&I payment has increased. Or, lenders may use the wrong index when adjusting variable rate mortgages. Or the original loan contract may contain mistakes.

Of course some homeowners have experienced pleasant surprises, such as the Miami condo owner who discovered a contract clause forbidding his lender from raising the adjustable interest rate above the 4% introductory rate. Unfortunately, approximately 75% of lender mistakes result in borrowers being overcharged.

Lenders admit they have never been this overwhelmed by mortgage demand. One mortgage division manager admitted: "This market is the craziest I've ever seen it and you have [various mortgage companies] saying 'No more, I can't take any more business.'"

With the responsibility for finding and reporting mortgage mistakes falling on the borrower, what can people do? First, always scrutinize your lenders transactions: compare your good faith estimate to your HUD-1 and always check annual mortgage statements. Second, if you suspect a mistake, contact your lender or an independent auditing company. Borrowers with high risk notes--such as variable rate loans, loans that have been sold several times, or ones where mortgage holders make frequent extra payments--should consider an audit to ensure against overpaying.

Unfortunately, mistakes that are discovered only represent the tip of the iceberg. Millions of Americans continue to be overcharged thousands of dollars without ever realizing it.

Robbie McNamera is a freelance writer.