Making Home Affordable program puts dent in credit scores

More than 720,000 Americans, including 12,000 Tampa Bay area residents, have asked lenders to modify their mortgages on the strength of the government's Making Home Affordable program.

But a program lauded as a homeowner's helper contains what could be a nasty surprise for thousands of mortgage borrowers current on their house payments.

If you accept a modification through Making Home Affordable, you'll probably pay for it with a lower credit score. In some cases the impact could be as much as 100 points. Future borrowing could be compromised, erasing some of the savings from the government bailout.

"For somebody with a high score, with a good credit record, the first blemish will be much more noticeable," said Craig Watts, spokesman for FICO, the company that generates the widely used 300-850 credit score. "The higher the score the farther it can fall.''

The overwhelming majority of Making Home Affordable participants are engaged in three-month trial periods designed to measure whether they can afford their modified house payments. So, unless they have pulled their credit scores recently, scarce few even know their credit has been affected.

Is the credit score drop an unintended consequence of the program? Not exactly. The U.S. Treasury views it as a side effect of the antiforeclosure cure.

"Borrowers, including borrowers who are current on their loans but asking for modifications based on imminent default, are certifying that they are unable to pay their mortgage and need government assistance," Treasury spokeswoman Meg Reilly said.

"These borrowers are a greater credit risk than borrowers who are not in imminent default and it is appropriate that the additional risk be reflected in their credit profile."

Nevertheless, the Treasury has tried to blunt, or at least delay, potential credit drops. It was reacting to reports that otherwise-Teflon credit scores were dropping up to 100 points thanks to participation in Making Home Affordable. People whose credit was already damaged didn't shed so many points.

Making Home Affordable targets not just delinquent homeowners but strapped borrowers who have never missed a payment. The goal is to keep house payments no higher than 31 percent of income. Banks usually accomplish that by lowering interest rates below market rate. The government picks up some of the tab.

Before Nov. 1, a person participating in a trial loan modification was reported to credit bureaus as a "partial payer." With the Treasury's encouragement, FICO helped create a new credit default category: "Loan Modified Under a Federal Government Program." In doing so, FICO agreed to wait until at least mid 2010 before reconsidering credit scores.

"We let the data speak for itself. But we have to wait till we have genuine data," Watts said. "We need to see how these people behave months after they've modified their loans. With that we can decide how much of a credit risk they are."

For banks, reporting loan modifications to credit agencies is optional. But most clearly do so. Jack Schakett, an executive in Bank of America's credit loss mitigation department, told reporters last month that his bank has been diligent about reporting the trial period participants.

By the bank's estimate, about 340,000 of its mortgage borrowers qualify for Making Home Affordable. Unfortunately for some program participants, misinformed bank employees have reassured borrowers their credit wouldn't suffer.

Lower credit scores generally push up interest rates on car loans, credit cards and mortgages and make it harder to rent apartments and apply for auto and homeowners insurance. It remains to be seen how badly government-backed mortgage modifications will harm credit longer term.

It depends on a person's broader payment history, said Norm Magnuson, a spokesman for the Consumer Data Industry Association, which represents credit reporting companies.

In Magnuson's view, those who defaulted on their mortgages before asking the government for help would get knocked about the worst.

"But if you've been good paying everything else, what would the significance be? Probably not a lot," Magnuson said.

According to Shawn Eckley of BB&T's mortgage department, even if you have a more serious blot on your credit — missed house payments leading to a bank-approved short sale — you can still buy another house after two years. Not that you'd get the best mortgage interest rate.

"Missing a mortgage payment two or three times shouldn't hurt that much," Eckley said.

James Thorner can be reached at jthorner@sptimes.com or (813) 226-3313.

What is Making Home Affordable?

Making Home Affordable began in March. The federal antiforeclosure program (makinghomeaffordable.gov) offers two options:

Home Affordable Refinance Program: HARP helps struggling homeowners get mortgage refinancing at market rates.

Making Home Affordable Modification Program:

HAMP, the more popular program, helps delinquent or not-yet-delinquent homeowners get below-market mortgage rates. To qualify, the current house payment must be more than 31 percent of monthly income. If you're up to date on your payments when applying, you have to cite a hardship such as prolonged unemployment or serious illness.



What you should know

HOW CREDIT REPORTING WORKS: Banks report borrowers' payment histories to credit agencies, who fashion credit scores using software from Fair Isaac Corp. FICO sells the scores back to the lenders. Banks use them to shape a borrower's interest rate.

HOW MAKING HOME AFFORDABLE AFFECTS CREDIT SCORES: During the three-month trial period for government-backed mortgage modifications, lenders had, until Nov. 1, reported homeowners as "partial payers." That generally lowered scores, more so for people with previously stellar credit ratings. After Nov. 1, banks were supposed to use a less punishing credit category to report on Making Home Affordable participants. Borrowers won't know until later this year how badly it will affect credit scores.

WHAT CAN YOU DO? Credit reporting agencies said your best bet is talking to your lender and learning beforehand how negatively they view Making Home Affordable participation. Lenders occasionally remove negative credit information.

Making Home Affordable program puts dent in credit scores 01/09/10 [Last modified: Friday, January 8, 2010 9:25pm]

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