New Bill to Prevent HAMP from Killing Credit Scoresby Tim Manni
Here’s a common scenario nowadays: You’re out of work and you know that you’re going to have trouble making your future mortgage payments on time. If you’re “lucky enough,” writes Gail MarksJarvis of the Chicago Tribune, to have your lender approve you for a loan modification, the last thing you need is for your credit score to drop as a result. Unfortunately that has happened to thousands of homeowners.
The good news is that a bill was introduced this week to protect borrowers’ credit scores from falling once their loan mod is approved:
That’s the essence of a bill introduced in Congress last week by U.S. Rep. Jackie Speier, D-San Francisco. It would insulate people from taking a credit score hit going through loan modifications.
Speier is trying to give people a fresh start as they get either a permanent modification that makes monthly payments more affordable, or a temporary modification, which lenders sometimes use before considering permanent relief.
“I am seeing people with sterling credit have their scores dinged as much as 100 points,” Speier said.
To make matters worse, according to a recent survey, more and more employers are using credit checks and scores to screen applicants:
According to a survey by the Society for Human Resource Management, 60% of employers are using credit checks when filling at least some of their openings. Only 35% reported checking credit in a 2003 survey, and only about 13% did so 1996.
The timing could not be worse.
“At exactly the time everyone’s credit seems to be going down the toilet, more and more employers are using this,” said Nat Lippert, research analyst for the union Unite Here. “You get in a Catch-22: You can’t pay your bills because you don’t have a job, and now you can’t get a job because you can’t pay your bills.”
So not only are you struggling to find a job and pay for your mortgage, that modification that you so desperately needed because you lost your job could prevent you from getting a new job…
However, there’s something that we all have to keep in mind here: the majority of borrowers apply for loan mods after they have already missed payments. While MakingHomeAffordable.com says a borrower doesn’t have to be delinquent to qualify for HAMP, we have received comments from readers who claimed that their lender rejected their application because they weren’t behind on their payments.
Accepting a loan modification can affect your credit score, but the actual effect will depend on a variety of factors.
Each month, servicers must describe to the credit reporting agencies the exact status of each mortgage. If you are current with your mortgage payments prior to the trial period and you make each trial period payment on time, your servicer must report you as current and also identify the loan as “modified under federal government plan.”
If you are delinquent (at least 30 days past the due date) prior to the trial period and the reduced payments do not bring the account current, your servicer must report the level of delinquency and also identify the loan as “modified under federal government plan.”
If a borrower preemptively seeks a modification before they’re delinquent, we agree, the last thing that should happen is for their credit score to drop as a result.
Yet, are we willing to say that borrowers who have missed mortgage payments shouldn’t have their credit affected at all? They technically have failed to meet the obligations they agreed to. Shouldn’t they have some form of mark against them, now matter how good their intentions? If that’s not the case, we may have to throw out the use of credit scores altogether because it renders those models fairly useless.
Furthermore, if we’re going to forgive credit scores for delinquent mortgage borrowers, will we have to do the same for those who miss credit card and auto loan payments as well?
Do you agree?