Fico Scores Are Being Wrecked by the Home Affordable Modification Program
More and more home buyers that entered the Home Affordable Modification Program are now shocked and horrified to discover that their credit scores have plunged from the mid-seven-hundreds to the low-six-hundreds and they're angry that they were not made aware of the negative effects of signing up for the program.
One of the almost immediate effects of a such a huge drop in one's credit score, will be large reduction in credit card limits, and some people are reporting of limits of $15,000 being reduced to as little as $500.
What is particularly shocking is that many of the people that signed up for the program were current with their mortgage payments.
They needed and got their mortgages reduced which is great, but they had their credit lines savaged which definitely isn't.
The aim of the Home Affordable Modification Program that began last March, is to help home buyers who are either delinquent, or are danger of defaulting on their mortgages, get better terms from banks by subsidizing their loans.
It received $75 billion in government funding, and is intended to be a safety-net for an estimated 3 to 4 million Americans who are in danger of losing their homes.
More than 1.
5 million home buyers received either a default or auction notice, or had their homes seized by banks in the last six months, and many of those people turned to the Home Affordable Modification Program for help.
Due however to the a lack of clear disclosures, the vast majority of applicants were unaware that signing up for the three-month trial period would decimate their credit ratings.
The hugely negative effect on a credit score is obviously not so dire for people who were delinquent and had shattered scores anyway, but it's an appalling thing for people that were not even behind on their payments, many of whom had very high ratings.
And it's in no way comforting to discover that this is simply the way the system works, and it wasn't, and isn't being caused by some kind of aberration.
Banks report loan modifications to the various credit bureaus, and the changes will frequently lower the consumer's credit score semi-automatically because of the way that the FICO algorithm is formulated.
A FICO spokesperson explained it like this, "We view an account that has been settled or renegotiated for less than the full amount as a negative, because historically consumers on reduced payment plans represent a greater risk, and the size of the impact may be more for borrowers with higher credit scores".
FICO scores range from 300-850 and the best mortgage rates are generally offered to people with a score of about 740.
It's not difficult to see then, that people who had never been in arrears on their mortgage payments would be the ones most likely to have their scores lowered the most.
The CDIA (Consumer Data Industry Association) which represents credit bureaus, has guidelines for lenders to follow when reporting loan adjustments, and many lenders abide by its guidelines.
They are only recommendations though, and a lot of lenders don't recognize them, and of the ones that do, many don't even have the necessary software to properly implement them.
JPMorgan Chase & Co.
, Bank of America, CitiMortgage, Freddie Mac and Fannie Mae and are all said to adhere to the CDIA rules, which state that home buyers in the trial period should be reported as current, and on partial payment plans if they are not delinquent with payments.
Some banks are taking a fairly tough stance on this however, and hold the belief that a loan modification should negatively impact a credit score because the borrower didn't meet his or her original obligation.
If you're thinking about getting your mortgage modified, then be sure to ask the bank if the change will be made through their proprietary program or through the government one.
Inquire also as to how change will affect your credit rating, and ask if the modification to your loan will be a temporary or permanent one.
One of the almost immediate effects of a such a huge drop in one's credit score, will be large reduction in credit card limits, and some people are reporting of limits of $15,000 being reduced to as little as $500.
What is particularly shocking is that many of the people that signed up for the program were current with their mortgage payments.
They needed and got their mortgages reduced which is great, but they had their credit lines savaged which definitely isn't.
The aim of the Home Affordable Modification Program that began last March, is to help home buyers who are either delinquent, or are danger of defaulting on their mortgages, get better terms from banks by subsidizing their loans.
It received $75 billion in government funding, and is intended to be a safety-net for an estimated 3 to 4 million Americans who are in danger of losing their homes.
More than 1.
5 million home buyers received either a default or auction notice, or had their homes seized by banks in the last six months, and many of those people turned to the Home Affordable Modification Program for help.
Due however to the a lack of clear disclosures, the vast majority of applicants were unaware that signing up for the three-month trial period would decimate their credit ratings.
The hugely negative effect on a credit score is obviously not so dire for people who were delinquent and had shattered scores anyway, but it's an appalling thing for people that were not even behind on their payments, many of whom had very high ratings.
And it's in no way comforting to discover that this is simply the way the system works, and it wasn't, and isn't being caused by some kind of aberration.
Banks report loan modifications to the various credit bureaus, and the changes will frequently lower the consumer's credit score semi-automatically because of the way that the FICO algorithm is formulated.
A FICO spokesperson explained it like this, "We view an account that has been settled or renegotiated for less than the full amount as a negative, because historically consumers on reduced payment plans represent a greater risk, and the size of the impact may be more for borrowers with higher credit scores".
FICO scores range from 300-850 and the best mortgage rates are generally offered to people with a score of about 740.
It's not difficult to see then, that people who had never been in arrears on their mortgage payments would be the ones most likely to have their scores lowered the most.
The CDIA (Consumer Data Industry Association) which represents credit bureaus, has guidelines for lenders to follow when reporting loan adjustments, and many lenders abide by its guidelines.
They are only recommendations though, and a lot of lenders don't recognize them, and of the ones that do, many don't even have the necessary software to properly implement them.
JPMorgan Chase & Co.
, Bank of America, CitiMortgage, Freddie Mac and Fannie Mae and are all said to adhere to the CDIA rules, which state that home buyers in the trial period should be reported as current, and on partial payment plans if they are not delinquent with payments.
Some banks are taking a fairly tough stance on this however, and hold the belief that a loan modification should negatively impact a credit score because the borrower didn't meet his or her original obligation.
If you're thinking about getting your mortgage modified, then be sure to ask the bank if the change will be made through their proprietary program or through the government one.
Inquire also as to how change will affect your credit rating, and ask if the modification to your loan will be a temporary or permanent one.
Source...