Loan Modifications: What is the effect on your credit score?

25th August, 2009

Good morning!!!
Last week I was working in Playa del Carmen, Mexico and several people asked me about the effect of the now popular “Loan Modifications” on their credit score. Here is a good note about that. Please do not hesitate to give me a call if you have questions: 847-962-0923. German

Sun Sentinel Editorial Board
August 21, 2009

Facing one of the worst housing markets in memory, struggling homeowners now have another incentive to walk away from an investment gone bad.

It’s hard enough to modify terms of a home mortgage, despite the federal government’s efforts to ease those procedures for individuals desperate to hold onto their houses. Unfortunately, the “Big Three” credit bureaus — Equifax, Experian and TransUnion — have issued new guidelines that allow lenders to report new mortgage loan modifications as “partial payment status,” a designation that could lower an individual’s credit score by more than 50 points.

A loan modification doesn’t reduce the principal, but makes it easier for homeowners to repay what’s owed by reducing the interest rate and stretching the length of the original loan. Credit agencies are paid to assess credit risks, and that includes people who can’t pay their mortgages. But these are extraordinary times. Penalizing a homeowner for successfully re-negotiating a loan could have the unwanted consequence of inducing more foreclosures.

First American CoreLogic, a real estate analysis firm, more than 15 million mortgage holders, or 32.2 percent, are “upside down” on their mortgages, meaning they’re paying more than their houses are worth. In Florida, the negative-equity picture is worse at 49 percent, and the figures are even higher in South Florida, hovering around 51.5 percent in the Miami- Fort Lauderdale area.

Now, thanks to the credit-rating agencies and an indifferent government bureaucracy of financial regulators, there will be homeowners who will unnecessarily become credit risks. While a loan modification provides a better outcome than a short sale, foreclosure or bankruptcy, punishing homeowners who work with their lenders is counterproductive.

If the credit bureaus won’t change the guidelines, the Federal Trade Commission should. If not, perhaps it’s time to consider President Obama’s proposed Consumer Financial Protection Agency.