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Does the Mortgage Modification Program Lower Credit Scores?

The HAMP Backstory

lowering credit scoresEarlier this month, the Obama Administration sent “swat teams” into mortgage servicers’ offices to investigate the problem of loans under the Home Affordable Mortgage Program (a $75 billion taxpayer-financed program put in place to curb foreclosure rates) as servicers are blamed for frequently losing paperwork, missing details and failing to complete applications.

With mortgage delinquencies rising, 375,000 borrowers are eligible for permanent loan modifications by the end of December and the Administration wants to make sure the banks make good on granting these modifications. Proof of reluctance to move past trial offer periods is that only 1,711 permanent mortgage modifications had been offered by September.

In response, the House Finance Committee called on the Administration to take action but I think everyone’s busy on a Hawaiian vacation…

That takes us to today…

Today, CNNMoney published a good old fashioned expose on the HAMP recipients noting that their credit scores are mysteriously dropping. It makes sense that creditors may look at HAMP recipients and make a judgment call that they are not currently eligible for their line of credit, but it does not make sense at all for credit scores to be falling, especially given that many HAMP recipients have been told that their credit score would not be impacted.

This creates a serious problem for what some call a failing program and I anticipate that the program will not be scrapped in the next 60 days out of sheer stubbornness on the part of the Administration, but when it does fold, you better bet some serious investigations will be performed.

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What does this mean for the real estate and mortgage professionals on the ground? Can our industry in good conscience direct homeowners to the HAMP program?

Lani is the COO and News Director at The American Genius, has co-authored a book, co-founded BASHH, Austin Digital Jobs, Remote Digital Jobs, and is a seasoned business writer and editorialist with a penchant for the irreverent.

25 Comments

25 Comments

  1. Sasha Farmer

    December 29, 2009 at 8:08 am

    Uh oh.. that is not good! Thanks for pointing out this article! Was just taking a great CRS class about a month ago that was giving us general ranges for the amounts credit scores were dropping for different distressed situations- short sale, foreclosure, strategic default, mortgage modification, etc, and those instructors may have still been behind this information, as they were discussing how so few people had taken advantage of this program, and how it should not impact your credit score.

    Bummer- have some updating to do on some posts now!

  2. Jason Sandquist

    December 29, 2009 at 8:57 am

    why wouldn’t it? they’re debtors… 😉

    • bficker

      December 29, 2009 at 11:44 am

      Why should it? The debt is already on their credit report. If the bank agrees to change the terms of the loan, and the homeowner is current, nothing has happened that should lower the score.

  3. Benn Rosales

    December 29, 2009 at 10:56 am

    Technically it should ding you, but it shouldn’t drag on your score if you’re maintaining the agreement, in fact, I would imagine on further study longterm, these same borrowers may see an actual bump (small) from participation based on current scoring realities. You see it a lot in first home borrowers that may ding while undertaking a mortgage, but while paying the mortgage they actually do receive the benefits of higher scoring if payments are received on time or within the contractual guidelines.

    • bficker

      December 29, 2009 at 11:43 am

      I’m not sure why it should “technically” ding you… Unless of course the bank told them they have to be late on their mortgage before they will do a modification. If a homeowner is current, and the bank agrees to take less, nothing negative has occurred. The problem is that we have been having banks tell clients (for a HAMP program or In-House modification) that they have to be 60 days late. We know that is not necessarily true, but by the time they contact us, they’ve already gone late.

      • Benn Rosales

        December 29, 2009 at 2:20 pm

        Your comment contains emotions and intangibles, and these are two things the bank nor the credit scoring industries take into account. In other words, yes, it is tragic that grandma died, but we’re taking the house because no one made the mortgage payments, it’s really quite logical.

        I’m not saying it’s right, I’m saying that logically, it make sense. More sense than the banks noting your shopping at Wal-Mart means you’re having financial problems, thus reducing your credit availability.

        • bficker

          December 29, 2009 at 5:42 pm

          I’m not sure where I had emotions and intangibles. It’s black and white: The homeowner is current, the bank agrees to a loan mod, there shouldn’t be a credit ding. Nothing emotional about that.

          The bank has, many times, told my clients they will not do a loan mod unless they are at least 60 days late. So the homeowner goes late. The only thing that should affect the credit score is the 60 day lates.

          Am I missing something? What is emotional or intangible about that?

  4. Cleg

    December 29, 2009 at 11:12 pm

    I had this exact situation happen to me. I was NOT thirty days late on my mortgage.. sliding in around 27 days and reached out to my mortgage company to see if I could do a one month payment deferrment. I was told I was the EXACT person that this modification was supposed to help. I had a $500 a month reduced payment for three months and now it will be lower $50 a month. I asked the specific question as to how my credit score would be affected and was told numerous times that my score would remain intact becuase I was not late at the time I entered the modification. This is NOT the case. My credit score has plummetted 150 points and I have been trying to get this finalized for 6 months now!! This program was not rolled out properly. No one knew the guidelines of the program and now I feel very misled. I would have rather struggled through it. I am now employed and have six months of slow pay vice a month or two 30 days late on my credit. I was unemployed and savings had run out. I have a job now which is great. Before you call me irresponsible how many of you can pay your mortgage, feed your family and keep the lights on living off of an unemployment check? I had savings and for five months I struggled through. I just feel misled and that this program was supposed to help me and now six months later I am just trying to get the thing finalized!

    • bficker

      December 30, 2009 at 12:10 am

      “Before you call me irresponsible…”
      This is happening to so many people, responsible or not. There are so many things out of our control. Besides, the banks were just as “irresponsible” when making many loans they shouldn’t have. For the most part, the blame can’t be placed on (most of) the homeowners.

  5. Cleg

    December 29, 2009 at 11:15 pm

    My real question is what can I do about it now?

    • bficker

      December 30, 2009 at 12:08 am

      Well unfortunately, it is an uphill battle from here. We have had (modest) success with clients going through a credit repair firm. Basically, your creditors have a set amount of time to respond to disputes on the credit report, otherwise they come off. So the company keeps submitting disputes until the bank fails to respond in time. It’s kind of a gray area, but the banks are screwing people over when they lie to them like this. Also, if you have any sort of email or anything in writing about the credit score stuff then you can submit that to the credit agencies and see if they will remove it. Anyway, good luck. Its gonna be a tough fight.

  6. Lead closer

    December 31, 2009 at 1:48 am

    After the recession had been triggered, I think nothing has been set right by the government.

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