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Mortgage miscues cost $8-billion

Consumers with adjustable rate mortgages at savings and loan associations may have paid $8-billion too much because of mistakes in calculating interest rates, a former federal regulator told Congress on Thursday. John M. Geddes said he was fired from the Federal Savings and Loan Insurance Corp. after he complained about the overcharges and refused to sign a confidentiality order promising to keep the controversy secret.

"Thousands of loans sitting out there were wrong," Geddes told a special task force of the House Budget Committee. He said the mistakes were unintentional, growing out of the complexity of setting the rates.

Federal regulators have responded to the issue first raised by Geddes by issuing a special bulletin to inform savings and loan associations about the problem, according to testimony by another witness, John F. Downey. S&Ls must review their loan portfolios to see if they have made these errors, according to Downey, the deputy director for regional operations at the Office of Thrift Supervision, which oversees the nation's S&Ls.

If consumers have a question, they should "make an inquiry" of their lenders to be sure the interest rate on a home mortgage has been calculated correctly, Downey said in an interview after the hearing.

The only detailed research into the problem has been the limited work done on S&L mortgages, and it is uncertain whether similar errors were made by banks and other lenders for home loans.

Federal law requires accurate disclosure to borrowers of the terms of mortgages. Geddes, who studied a sample of loans from Oklahoma, Texas, Michigan, Illinois, Indiana, Kentucky, Georgia, Iowa, Ohio, Tennessee and Florida, said he found an error rate of about 30 percent.

He subsequently consulted with federal regulators around the country, and calculated that the national overcharges on mortgages might be as high as $8-billion. Counting penalties due borrowers, the cost to S&Ls would be an estimated $15-billion.

About 12-million adjustable rate mortgages have been issued in the past 12 years.

There are as many as 300 different indexes used for figuring interest rates. An example: a borrower's contract may call for figuring his rate based on Treasury bill rates on the 30th day of the month, but the S&L would set the rate based on the 29th day.