Shocking News About The Home Affordable Modification Program

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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 Home Affordable Modification Program that was started last March is a program that is tailored to help people who are either delinquent, or are danger of defaulting on their mortgages by bringing about a reduction in their mortgage payments. 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.

Lenders report their loan modifications to credit bureaus, and the changes will often automatically lower the borrower's credit score because of the way the FICO formula is structured.

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 to 850, and given that a score of 740 is generally needed for the best mortgage rates, it's easy to see that somebody that had never been behind on his mortgage would be the most likely to have his credit rating downgraded 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 simply recommendations however and a large number of banks don't follow them, and many don't even have the required software to keep them up to date with changes.

JPMorgan Chase & Co., CitiMortgage, Bank of America, Fannie Mae and Freddie Mac are all said to adhere to the CDIA rules, which state that homeowners 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 considering applying for a loan modification, then be sure to ask your lender if the change will be made through the government program, or through the bank's proprietary program, and ask whether the change will be temporary or permanent, and how the changes will affect your credit rating.