U.S. Representative Jackie Speier has introduced a bill in Congress that if passed would help protect the credit scores of homeowners who receive permanent mortgage modifications. Currently, the credit scores of homeowners who receive permanent mortgage modifications can drop as much as 100 points. The drastic drop in these homeowners” credit scores could prevent them from getting other loans and even hurt their chances to securing unemployment. That’s why the bill is supported by many homeowner advocates. But mortgage lenders are up in arms about the proposed legislation saying that insulating borrowers’ credit scores from the ill effects of a mortgage modification is deceptive and will prevent banks from making accurate assessments of a borrower’s credit worthiness.
“To deny information on modifications being used in credit scores only harms the ability of lenders to evaluate the creditworthiness of borrowers in the future, making it harder to determine a borrower’s ability to repay any future loan,” said Joseph Pigg, vice president and senior counsel of the American Bankers Association.
But the reality is that we are facing unprecedented circumstances right now. Sixteen percent of Americans are unemployed or underemployed; the housing market as crashed 30 percent and the number one cause of foreclosure is now unemployment. The reality is that many otherwise creditworthy individuals are falling behind on their bills and facing foreclosure. Just because someone has faced foreclosure or is receiving a mortgage modification does not mean that they are somehow not creditworthy or not willing to pay their bills. Even if the mortgage modification was allowed to continue to negatively impact credit scores, it still would not be an accurate indicator of whether or not the person is willing to pay their bills simply because we are not facing normal economic circumstances.