The Obama administration’s loan modification program, HAMP (Home Affordable Modification Program) has been criticized for being too confusing, taking too long to complete, not enrolling enough distressed homeowners, not making enough permanent modifications, and just generally being ineffective (the program was designed to help millions, but only 170,000 homeowners have completed the modification process as of February).
Now the critics can add one more item to that list: applying for loan modification can reduce credit scores by as many as 100 points. This can make it more difficult to get another loan, or find a new job. The worst part is that many homeowners are not informed of possible credit damage when they apply for modification. Foreclosure would have a more dire effect on a borrower’s credit, but critics say that penalizing loan modification adds insult to injury.
Unsurprisingly, the credit industry supports the penalty, on the basis that other lenders need to know a potential borrower is having financial difficulties. They also say that over time credit scores will gradually increase as long as people keep up with their payments. This, of course, is little consolation to borrowers who need to use their credit now.
The Obama Administration says that the credit penalty is a better outcome than foreclosure. In an AP story, Treasury Department Spokeswoman Meg Reilly said foreclosure: “brings far more serious financial consequences for borrowers and their families”.
Government efforts to stabilize the housing market and mitigate the number of foreclosures have been admirable, but thus far have fallen short of their goals. The good news is that more and more lenders are enrolling in and ramping up the modification efforts. Hopefully these efforts will take a broader effect and help bring about a more widespread recovery.
What do you think about loan modification efforts thus-far? Are they appropriate and will they bring about necessary changes? Join the discussion below.
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