In the wake of recent turmoil in the financial industry, the management of West Hills, California-based GN Mortgage has taken an aggressive approach to the servicing problems caused by adjustable-rate mortgages (ARMs). To begin, we asked ourselves two simple questions: What are the problems, and how do we fix them?
Although the questions seem simple, the answers are complex and time consuming.
In short, our company needed a focused plan that called for a commitment on all levels, from upper management to data entry personnel. Four phases were developed to combat the servicing problems we were encountering. They were to:
* develop a plan
* implement the plan
* develop computer programs for our needs
* assign adequate personnel for all phases.
We first identified two main problems on which to focus: loan-level adjustments to the borrowers and loan-level adjustments to the investors (service fees).
We found several reasons that loans were incorrect:
* incorrect notes
* the "all of our loans do the same thing" syndrome
* incorrect index type
* incorrect index values used in calculations.
For example, there were six-month loans that called for a payment change in the eighth or sixth month, instead of the seventh month. Consequently, the loans were set up in the computer system wrong and adjusted one month too later or too soon. There were loans with margins that did not fall within the parameters of a specific program or ARM product code. Also, we discovered some loans that were not rounded up to the nearest 0.125 percent as marketing insisted.
If you have staff setting up your loans in a mindles, mechanical way, errors are sure to occur--and unfortunately, not just small ones. Getting loans input into the computer exactly the way the documents read is the first and most important step to having ARM loans perform correctly. Once this information was input accurately, we tackled the index rate.
The index rate is based upon the interpretation of notes regarding the index based on the most recent index figure available as of 45 days prior to each change date.
The change date refers to the date the interest rate changes. We interpret this language to mean the date the rate is available, not "as of." For example, the one-year Treasury bill rates are for weeks ending on Fridays. The rate, however, is not available until Mondays. If you look back 45 days before an interest rate change date and find that that day falls on a weekend, the rate selected...