Homeowners that find themselves unable to meet their mortgage requirements often turn to loan modifications as a measure to avoid default or foreclosure. However, this process often impacts their credit score negatively, making it more difficult to secure financing and competitive rates. For those who are unemployed, a lowered credit score may also hinder their ability to find a new job, further damaging their financial situation. But a new bill introduced by Representative Jackie Speier of California last week may protect the credit scores of homeowners seeking a modification.
"Homeowners shouldn't have their credit scores damaged for doing the right thing," Speier said. "Rather than rewarding responsible homeowners who modify their mortgage payments to keep their homes, the credit reporting system punishes them."
Current laws allow lenders to treat modified loan payments made on time as partial, which are then reported to credit bureaus as incomplete or delinquent payments. This reporting system forces a consumer's credit score to plunge and their credit report to reflect the payments as delinquent.
Under the proposed Protecting Homeowners' Credit History Act, lenders and banks would be prohibited from reporting on-time modified payments as delinquent. The measure would also prevent credit bureaus from reporting the on-time payments as delinquent on the consumer's credit report.
"Home values have plummeted and one in four homeowners in America own a home worth less than their mortgage. This legislation protects homeowners from getting dinged on their credit scores simply because they've had their loans modified," Speier added.
The bill has already earned the support of the California Reinvestment Coalition, whose executive director Kevin Stein said it will be a great way to help homeowners that choose to work with their lenders rather than simply walking away from their mortgage obligations.
Millions of homeowners are currently facing default or foreclosure on their mortgages. RealtyTrac estimates that the U.S. will see nearly 3 million foreclosure filings and 1 million bank repossessions by the end of 2010. Though loan modifications may negatively impact a consumer's credit score, it may be the only way to avoid losing their home. If they choose to join a program, they may secure the lowest rates through the federal Home Affordable Modification Program, which has been instrumental in helping more than 400,000 Americans achieve permanent modifications.