New Way To Report Loan Mods That Might Not Hurt Your Credit
Posted: Monday, November 09, 2009
by Jim Johnson
Metropolitan Mortgage
A mortgage modification might not hurt your credit rating.
There is a new way to report loan modifications to mortgages.Like many people considering a mortgage modification, George W. of Everett, WA., wonders how it will affect his credit score.
Unlike most people in this situation, George has never missed credit payments and has a very high FICO score of 805. But when George, who works for the state of Washington, suffered a 15 percent pay cut as a result of the state's furlough program, he asked his mortgage lender to lower his payment under the government's Home Affordable Modification Program.
Phil Jackson of Marysville, WA said his FICO scores dropped from the mid-700s to the mid-600s after his lender put him on a trial modification and reported it as a partial payment. On the plus side, the trial modification has cut his monthly payment by $1,150.
Before Nov. 1, lenders reported mortgage modifications in various ways. Some reported them as paid as agreed. But a lot were reporting them as partial payments, which have a negative impact on a person's FICO score. "That is a serious derogatory, in the same category as a foreclosure or short sale," said FICO spokesman Craig Watts.
As of Nov. 1, lenders have a new, more benign way to report government-sponsored loan modifications. But you need to ask your lender how they will report.
Under guidelines put out by the Consumer Data Industry Association, lenders should report them as a "loan modified under a federal government plan," said Norm Magnuson, a spokesman for the association, which represents credit bureaus.
FICO will ignore this new notation for the time being. FICO is the number one provider of credit score information. It will neither help nor hurt a person's credit score until FICO decides how to treat it.
"Once there is enough documented performance for people who went through (a federal modification), we will be able to assess the accumulated data to determine how predictive it is," said Watts. "The analysts prefer having at least a year's worth of performance data" before making any changes to its credit-scoring formula.
Under the association's guidelines, if a person is current with his mortgage payments before and during a trial modification period (typically three months), the lender is supposed to report it as current, Magnuson said.
If the modification is approved after the trial period, the lender adds a comment that it was modified under a federal plan instead of the dreaded "partial payment."
If the loan was at least 30 days past due before the trial modification, payments during the trial period "will not bring it current," Magnuson said. The lender "still reports the appropriate level of delinquency." But if the modification is approved, it will be reported as modified under a federal plan. So now you don't have to fall behind by 30 days to qualify for a loan mod.
The new designation could hurt a borrower down the road if FICO decides to treat it as a risk factor. But even if it never enters the scoring formula, potential lenders can see it on an applicant's credit report and decide for themselves how to treat it.
"We have in the past looked beyond a credit score at someone's full credit history and we will continue to do that," said Tom Kelly, a spokesman for Chase. Don't believe that for one minute. You are a number to any bank not a person.
The new guidelines won't help people who have already modified a loan, although a lender could, at its discretion, apply them retroactively, Magnuson said. This is why you should confirm, perhaps even in writing, how they will report to the bureaus.
The new reporting guidelines do not apply to loans that are refinanced or put into forbearance. They have their own, separate reporting guidelines. Nor do they apply to loans modified outside of government programs.
Should borrowers like David with good credit scores go ahead with modifications?
"First off, make sure it is a government-sponsored loan modification and not a home-grown one," said John Ulzheimer, president of consumer education with Credit.com. "Also, ask the lender up front: ‘Will you continue to report me as current during the trial period?'
"If the answer to both questions is yes, Ulzheimer would proceed with a modification, knowing it could dent your score if FICO ultimately treats it negatively.
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