On March 19, 2010, AP real estate writer Alan Zibel published an article titled Homeowners See Credit Scores Sink After Signing Up For Mortgage Relief. The key point of the article is that the mere act of applying for a HAMP loan modification results in a serious blow to a homeowner’s credit score.
The HAMP program has already had its share of well-publicized problems – the main one being that very few individuals qualify for a permanent modification.
Besides this low approval rate, people are now discovering that there is an additional downside to HAMP: damaged credit scores. Application to the program in itself reduces a person’s credit score, sometimes by as much as 100 points. This new problem is particularly troubling because it catches people by surprise. Nothing about the application process gives consumers any warning that a lowered credit score is an inevitable result of submitting the application.
And these lowered scores can obviously be a big problem. They make it more difficult for consumers to obtain necessary loans. They present obstacles to a job search. HAMP-created credit damage can even push a struggling family over the edge, causing the family’s financial position to cross the line and become irretrievable.
One example of this HAMP credit-score problem was discussed in the AP article. Due to job loss, the Owens family of Harrisburg, Oregon was struggling. They were barely able to pay their mortgage and utility bills. The family needed a used vehicle, and Mr. Owens was pre-approved for a $2000 loan. Mr. Owens was unable to find a suitable vehicle within the 30 day pre-approval period. When he re-applied, Mr. Owens was shocked to learn that, because of the hit to his credit score caused by his application to the HAMP program, he was denied for the vehicle loan. “I should have been told,” that this might happen, Owens said.
Kathy Conley, a Michigan housing counselor with GreenPath Inc., explained: “It’s a feeling of being duped.”
In my view, consumers should be told about this credit score issue before their application for a HAMP loan modification is accepted. In light of the low approval rate (at least as the HAMP program has been administered so far), consumers should be able to weigh whether they wish to take the significant hit to their credit score in exchange for a small chance at winning a loan modification.
Share your thoughts on this issue. Add a comment below.
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Interesting about HAMP applications lowering the credit score. Seems to be not much good happening with HAMP, except that in some states it seems to be the only thing slowing down foreclosure a little bit. But why is it that no one ever seems to qualify for HAMP? Is it because the lenders don’t want them to and there are too many “outs” for the lender in the HAMP law, plus they get paid by the gov’t for processing HAMP applications anyway? Looks to me like yet another corporate welfare program. Sorry to sound cynical, but that’s how I feel about the whole subprime loan scandal and the utter lack of remediation efforts.
Thanks for your thoughts on that Jennifer. I really don’t know why banks don’t approve more of these HAMP applications. As I understand it, the banks would come out ahead by modifying the loan as opposed to just going through with the foreclosure. So the way HAMP is being administered is against the self interest of the bank. It may just be a matter of overwhelmed and undertrained staff at the banks who are unable to deal with it all.
I certainly agree that consumers should be advised that their credit score will be affected by applying for the modification. However, in cases of hardship, applying for a loan modification is the only way to get relief and keep the home. What are the other alternative? short sale? deed-in-lieu? a worse hit on the credit score. This is a real test as to whether it’s a real hardship or a case of someone wanting a lower rate.
Good point Deborah. I agree that there are few alternatives available when a person is struggling to meet mortgage payments. Perhaps more meaningful solutions will be coming along because foreclosures continue to rise.