Nearly 100,000 families trying to save their homes with a federal-government mortgage modification could find their credit scores wrecked along the way because of sloppy paperwork.
It’s an unintended consequence of banks’ and credit bureaus’ vast power, and the structure of the federal Home Affordable Modification Program, experts said. HAMP allows negative reporting during a trial modification, since the full amount of the loan is not being repaid.
In New York, where foreclosure starts rose 139 percent in February compared with a year ago, according to RealtyTrac numbers, the problem is common.
Generally, a modification will be initiated during the pre-foreclosure hearing. Iran Lisser, a financial counselor with New York’s Neighborhood Trust Financial Partners, says most of the two dozen clients she has worked with in the last year on modifications have suffered incorrect-information damage to their credit reports. She now routinely alerts clients to this issue, helps write dispute letters and makes sure homeowners regularly check their credit reports.
“It’s not in the banks’ interest to clear the credit reports,” said Lisser. “The bank is not going to do it. It’s up to you.”
Experts say that the credit-report problems arise when the loan converts to a permanent modification and the bank doesn’t update the negative mark to neutral. Relieved about avoiding foreclosure, many consumers are surprised to discover this damage and have trouble rectifying it without professional help.
“It creates a Kafkaesque situation,” said Evan Hendricks, author of “Credit Scores & Credit Reports.” “The larger banks are very automated, and you can’t get them to modify their credit reporting along with the fact that they’ve modified the loan.”
While hardship numbers are tough to come by, consumer attorneys and financial experts report it is a widespread and growing problem. Damage is instant and devastating. Homeowners with good credit can see their scores plummet to subprime. Credit limits and access are slashed, and consumers cannot refinance their loans.
Experts caution that homeowners should not avoid modifications for fear of credit-report damage, but rather ought to demand written assurance that the bank will not make a negative report if the borrower honors the new deal.
The issue is coming to the fore as the credit-reporting industry—dominated by the big three credit bureaus Experian, Equifax and TransUnion — faces renewed pressure over mistakes. A bombshell Federal Trade Commission report released last month found that 5 percent of consumers, or roughly 10 million people, had mistakes on their credit report that were significant enough to raise costs of credit or reduce access. If a similar percentage of the nearly 2 million homeowners who have started in HAMP have such serious errors, that works out to 99,365 homeowners.