The Emerging Congressional Credit Score Fiasco

While watching CNBC this morning, I was shocked to see/hear a debate involving, I believe, a House member, and another guest, concerning a bill to shield consumer credit scores from the effects of mortgage modification.

We saw, in 2007 & 2008, what happened when credit rating agencies dumbed-down their ratings for CDOs and various mortgage-backed instruments. It resulted in a catastrophe as many investors, overly reliant on ratings from S&P, Fitch or Moodys, simply took AAA ratings on faith and bought instruments which later were found to perform far below the expectations of their credit ratings.

Now we have Congress trying to whitewash consumer credit scores.

The argument put forward by the Congresswoman on CNBC was that mortgage modifications are simply contracts between two consenting parties, and, therefore, involve no forgiveness nor default or delinquency on any loan.

The argument against allowing this hiding of true consumer credit history is that any modification is, in fact, the failure of the consumer to honor the terms of the original contract and, thus, be in default or delinquency on an instrument to which they were a party. Additionally, it's very disingenuous to say that banks are doing modifications out of their own free will, when, in fact, the current administration coerced banks into suspending foreclosures and offering modifications, instead.

So we have yet another situation in which the federal government is attempting to alter useful private industry measures and practices, distort reality and rewrite history.

Combined with the recent FINREG bill, this should add impetus to financial institutions to back away from lending to all but the best-collateralized, least-risky consumers.

Everybody else, especially those with anything approaching a middling, sanitized credit score, will probably be denied credit.

I guess this proves that Congress has learned nothing from the recent financial sector meltdown and its own role in the mess, via Fannie, Freddie and too-complex regulatory processes.

Can we say "unintended consequences?"