Because mortgage loan modification is nothing more than a temporary reduction in interest rates, many financial experts believe it should have no impact on credit scores. It should not trigger a notation on a consumer’s credit report any more than does a temporary or promotional reduction in a credit card interest rate.
However, that’s not how FICO sees it at this time.
Lenders who follow reporting guidelines, will report loan modifications to FICO as a “Partial Payment Plan,” which is damaging to a consumer’s credit scores.
These new guidelines were issued as a result of agreement between the Consumer Data Industry Association and the credit bureaus. Apparently, representatives from FICO were not first consulted to determine how a consumer’s credit scores might be affected.
The possible reason for this apparent oversight could be that FICO has yet to conduct research into how loan modifications should or should not affect credit scores. They do not yet know if loan modification makes a consumer a higher credit risk.
Since loan modifications are a relatively new solution, it could be years before sufficient information is gathered to make a true determination.
Some in the industry insist that consumers who have their loans modified are merely postponing the inevitable – that many, if not most, will be in default again within 6 months.
Consumer advocates maintain that the “Partial Payment Plan” designation is false, misleading, and unfair to consumers who see their credit ratings drop as a result. A loan modification does nothing to reduce the balance due. The consumer will still be obligated to pay the entire balance, and the interest rate reduction will not be permanent. Thus, consumers who take advantage of this portion of the “Making Home Affordable” program should not be penalized by lowered credit scores.
When it comes to FICO scores, however, loan modification is the least of the evils faced by homeowners who are upside down in their mortgages. The only option that will not damage scores is selling the house for enough to cover all outstanding debt against it.
The following cause even greater damage to credit scores:
Short sales, which are reported as charge offs, settlements, or the initial steps toward foreclosure.
Foreclosures, which are, of course, reported as foreclosures.
Forfeitures in lieu of foreclosure are reported as a voluntary foreclosures.
Short refinances are reported as settlements or charge offs. A short refinance is a refinance with the same lender, but with a portion of the principle balance forgiven.
Author:Marte Cliff
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