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July 23rd, 2010

New Bill to Prevent HAMP from Killing Credit Scores



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.

According to MakingHomeAffordable:

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?

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6 Responses to “New Bill to Prevent HAMP from Killing Credit Scores”

  1. Shnaps Says: July 23rd, 2010 at 10:59 am


    As you point out, this would serve to defeat the very purpose of having credit scores. If once elects not to make contractual payment(s) when due for whatever reason, then that data should be reflected on their credit bureau report, and included in the computation of FICO score. Period.

    Anyone so ‘concerned’ about their ’sterling’ credit score doesn’t need a loan modification.

    Which is why current borrowers get turned down all the time for HAMP – they are not in imminent default. They don’t have any legitimate hardship. They simply want a lower rate & payment. Imagine recieving such a benefit with no adverse effect on the ‘ol credit bureau report? Heck – who wouldn’t want that? Doesn’t hurt to ask, right? There’s no cost to apply for a HAMP mod.

    Yet another reason HAMP is a total failure.

  2. Tweets that mention Proposal: New Bill to Prevent HAMP from Killing Credit Scores | HSH Financial News Blog -- Topsy.com Says: July 23rd, 2010 at 11:21 am

    [...] This post was mentioned on Twitter by Jamie Smith Hopkins, HSH Associates. HSH Associates said: Bill 2 Prevent HAMP from Killing Credit http://bit.ly/9eYJcK Touchy subject: should delinquent borrowers have credit score declines 4given? [...]

  3. Tim Manni Says: July 23rd, 2010 at 11:58 am


    Thanks so much for the comment. We’re now following you on Twitter — you can follow us here:


    Hope to hear from you soon,

  4. Efinity Mortgage Says: July 28th, 2010 at 2:19 pm

    A credit score represents your ability to fulfill current and future financial obligations. If you are unable to afford your current mortgage (and therefore a current financial obligation) shouldn’t your credit score be lowered as a result?

  5. Amie Says: August 6th, 2010 at 3:22 am

    We need to make it illegal for employers to pull credit scores!

  6. Tim Manni Says: August 6th, 2010 at 9:23 am


    Thanks for commenting. Why should it be illegal? Not that I disagree necessarily, but I wondering why you think so.


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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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