Congresswoman Jackie Speier introduced the Protecting Homeowners' Credit History Act on July 15, stating, "Homeowners shouldn't have their credit scores damaged for doing the right thing. Rather than rewarding responsible homeowners who modify their mortgage payments to keep their homes, the credit reporting system punishes them."

Of course, she's partially right and partially wrong.

The loan modification process has largely been a train wreck since day one. Originally mortgages were reported to the credit bureaus as a "Partial Payment Plan" – which is considered a major derogatory item in your credit scores. Further, delinquent payments now pollute credit reports thanks to the mortgage lender requiring the homeowner to make less than their contractual payment just to prove that they can. Add to that the workload disasters that are causing some loan modification applications to take 6-9 months to be processed, and then denied, and you have a failure of epic proportions, which is considered a major derogatory item by credit scoring models.

While shielding a consumer's credit report from the fallout of a loan modification is a solid hypothesis, it might not be the right thing to do. If research yields findings that consumers who modify their loans are an elevated credit risk then the negative credit impact was warranted. But we don't know this yet because we've yet to see whether there is sufficient performance among consumers who've modified loans.

What we do know is this: Many consumers are simply trying to lower their monthly payments through a formal process with their mortgage lender. Does that sound familiar? It should, it's called a refinance. Assuming that the desire for a lower payment equates to a riskier borrower has not been proven and seems misplaced considering that we'd all like lower payments, for everyone.

What the legislation should include, and I don't believe it does, is a requirement that ALL loan modification applications must be fully processed within 30 days. That would all but guarantee no credit impact at all. The requirement to prove that you can pay less than you have been paying is comical and shouldn't be a requirement of the program. This would get HAMP back on the right track.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

The Department of Housing and Urban Development recently announced that borrowers who seek an FHA loan, a loan insured by the Federal Housing Administration, must now achieve a FICO score of at least 500 for consideration. According to a CNNMoney article, this is the first time HUD has set hard and fast score cut offs. The questions are, what have they accomplished...and what are they thinking?

HUD’s new score requirements eliminate roughly 1% of the population. That’s right, almost 99% of the U.S population has a FICO score higher than 500. If HUD wants to mitigate risk then 500 was a shade too low (sic).

There is some sense behind the decision though. Because of their stratospheric FICO scores, consumers who fall below 580 will be asked to pony up a 10% down payment. This forces equity into the loan and helps to secure the lender when the loan goes into default (notice I didn’t say "if").

So for the newly minted 70,000,000 consumers who have scores below 650 don’t despair. HUD is still willing to lend you hundreds of thousands of dollars. It’s almost like someone hasn’t been paying attention.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

I wrote recently about the problems at Fannie Mae and Freddie Mac that led them from being healthy, economically viable enterprises to becoming wards of the state. They used to have a combined net worth of close to $100 billion and now they are $100 billion underwater, and counting.

The Congressional financial restructuring act did not even attempt to deal with it other than to allocate $30 million or so to hire consultants to "study" how best to privatize them sometime in the future.  I suppose that is because today no one has a clue.

I said that one of the problems was that they forgot that the core mission of any business is to survive.  After that is assured, they can worry about expanding. After that, they can worry about things that are more altruistic, like expanding homeownership opportunities. They were sunk in large part because political forces at work in Washington D.C. thought, incorrectly as it turned out, that they could use Fannie and Freddie to achieve political goals without any attendant risk.

To that end, they inserted political goals into their mission statement, mandating that they should serve under-served markets, particularly loans to low- and middle-income borrowers.  As a result, the agencies bought billions of dollars of toxic loans, mostly to those borrowers, that later went bad. That helped create the meltdown.

You would think they would have learned their lesson.  Wrong!

In a statement this week, the Federal Housing Finance Agency that supervises Fannie and Freddie issued an announcement with the intention to:

"establish a duty for Fannie Mae and Freddie Mac (the Enterprises) to serve very low-, low- and moderate-income families in three specified underserved markets -- manufactured housing, affordable housing preservation, and rural markets."

Note that the politicos forgot the trouble that lax underwriting standards have gotten us into. In the announcement, it specifically says that borrowers will be evaluated on:

the development of loan products, more flexible underwriting guidelines, and other innovative approaches to providing financing;

We got into this mess in part because of exactly those kind of statements and policies.

As to the rural program, it's designed to serve families who may have a credit and income history but who forgot to save money and who thus have no down payment.  Sound familiar?  Maximum loan-to-value is 102% and private mortgage insurance, PMI, is not required because the loans are government guaranteed.

Sounds like another disaster in the wings.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.