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We have been asked by several professionals to
focus on Loan Modifications and how they affect the credit
scores. As usual there is much contradictory information about
the affects of a loan modification.
What is a Loan Modification? Modifying an existing loan made by
a lender in response to a borrower's long-term inability to repay the
loan. Most Loan modifications involve a reduction in the
interest rate on the loan, an extension of the length of the term of
the loan, a different type of loan or many of these
choices. Lenders are open to Loan modification's because it will
cost them less than the alternatives.
According to www.myfico.com the
scores will not be affected if the loan has the same original account
number. The balance, terms duration (length of time
mortgage is paid for), and monthly payment amount will change based
on the new information agreed upon by the bank. A totally
new account will decrease the score. As we know closing
and opening credit can reduce scores as much as 60 points (past
articles can be reviewed on our website). So if a new loan is
reported and the old loan is closed the scores will take a big hit
for at least a year. The site mentions nothing about
partial payment plan. From what I have studied I believe they
are discussing loan modification's that are not part of the
"Making Home Affordable Plan".
According to Fico Forums where loan modifications are discussed and
responses managed by a Fico expert moderator, it is
acknowledged that a partial payment agreement will be updated on the
credit reports and reduce scores dramatically. These responses
are directly related to the "Making Home Affordable Plan"
created by the government. These loans are government owned
loans and not all loan modifications fall into this category.
According to the CDIC (CONSUMER DATA INDUSTRY ASSOCIATION) the loan
modification candidate must make partial payments on the loan for a
trial period of 3 months, or more, depending on the situation.
To qualify for the governments "Making Home Affordable
Plan" the 3 months is required for acceptance into the
modification program. You can read more at http://makinghomeaffordable.gov/.
Since the loan is not being paid as it was agreed the credit bureau
will update it as "partial payment plan" or "modified
payment agreement" which is a negative to the scores. It
could drop the score as much as 100 points depending on your overall
credit profile. We see this often when consumers go into debt
consolidation programs. These programs are given by non for
profit organizations that work directly with the creditors to reduce
interest rates on debt and increase the length of time debt can be
paid off by consumers. They mark the credit report under each
account "debt consolidation repayment plan" or "in
debt consolidation payment plan" and even though these accounts
may have never been late they are still considered derogatory if they
are in a partial payment plan. It does make sense if you think
about it. You are now paying back the debt but not at the
original agreed upon terms. Remember, as always, the higher
your score is before you have a delinquency the greater it drops when
the new update is reported by the bureaus. The partial payment
plan mark is considered derogatory and the score will plummet.
Here is what the CHIC said exactly:
"Mortgage Loan Modification Program
- Freddie Mac and Fannie Mae"
"Freddie Mac & Fannie
Mae are offering a streamlined modification program starting
12/15/2008 for a targeted group of borrowers with certain loan
criteria. As it relates to credit reporting, all eligible loans under
this program must be at least 3 payments delinquent. The consumer
must first make 3 payments (reduced payments) during the 3-month
trial period before the loan modification will be made effective.
During that time, the data furnisher should report the true Account
Status Code, which is delinquent, and Special Comment AC (Paying
under a partial payment agreement). "
My interpretation after reading through much of the CHIC info:
It seems that the 3 trial payments are the 3 late payments they
discuss that are required and reported as delinquent. You don't
have to be late 3 times prior to the 3 trial payments. Read
more at http://cdia.files.cms-plus.com/Metro2/MortgageLoanModificationProgram.pdf.
To summarize the studies we have found:
If you go into a loan modification through the "Making Home
Affordable Plan" you will most likely have a great decrease in
your credit scores. There are times that banks just make
mistakes and don't update to the credit bureaus. If this
happens consider yourself lucky in at least one aspect of the
situation. If you go through a loan modification with a
bank that is not a part of the MHAP plan your credit will reflect the
way My Fico defined the credit update. As long as it is the
same loan and account # you will see minor or NO change in the credit
score.
So far we have not come across 1 report showing "partial payment
plan" for a loan modification but that does not mean it isn't
happening. It stands to reason we will be seeing an enormous
amount of these in the next few years when consumers want to begin to
rebuild and improve their credit scores.
"Great credit brings
great opportunity"
Copyright ©2009 North Shore
Advisory Inc.
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Tracy A. Becker
President
155 White Plains Road
Suite 203
Tarrytown, NY 10591
(914) 524-8300
(914) 524-5014
www.northshoreadvisory.com
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