Credit scores can drop after loan assistance

March 20, 2010 at 12:00a.m.

Associated Press

WASHINGTON

Some homeowners who sign up for the government’s mortgage-assistance program are getting a nasty surprise: lower credit scores.

For borrowers who are making their payments on time but are on the verge of default, the Obama administration’s loan- modification program can reduce their credit score as much as 100 points. That makes it harder to get a loan and can present a problem when applying for a new job.

Housing counselors say it’s unfair, especially because the news often comes as a surprise to homeowners.

“Why should people’s credit be hurt even worse when they’re trying to do the right thing?” said Eileen Anderson, senior vice president at Community Development Corp. of Long Island, a housing counseling group in New York.

And many homeowners are angry that a program designed to help carries such a penalty, said Kathy Conley, a housing counselor with GreenPath Inc., a nonprofit group in Farmington Hills, Mich.

“It’s a feeling of being duped,” she said.

Still, the impact is far less severe than a foreclosure, where borrowers typically find their credit is in tatters for years. That’s due to the cumulative impact of many months of missed payments and the foreclosure itself, which drags down a homeowner’s’ credit by 150 points or more on a scale of 300 to 850.

To enroll in the Obama administration’s $75 billion “Making Home Affordable” program, borrowers enter a trial period in which they make at least three payments. But some are finding out that their credit score takes a dive during this trial phase. It happens once their mortgage company notifies the three big credit bureaus — Experian, Equifax and TransUnion.

For delinquent borrowers, the damage was done when they fell behind on their loans.

But for homeowners who are having financial troubles but managing to pay their bills, a request for a loan modification is the first sign of difficulty. And that means a sharp drop in the borrower’s credit score.

The credit-rating industry defends the practice. People who sign up for loan modifications would not be asking for help unless they were having severe money troubles, said Norm Magnuson, spokesman for the Consumer Data Industry Association, a trade group in Washington that represents the credit bureaus.