Impact of Loan Modification on Credit Scores

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Impact of Loan Modification on Credit Scores

Posted by Ben Nicolas on Wednesday, September 9th, 2009 at 4:04am.


With the introduction of the Home Affordable Modification Program (HAMP) many homeowners that are not currently behind on their mortgages are being faced with a situation where they are being offered potential relief.


Obviously their first reaction would be to accept this relief but the government had done something smart (yes, give credit where credit is due).  They made it mandatory for loan servicers to report derogatory history to the credit bureaus for all borrowers who participate.  The creators of HAMP did this to weed out the people that can afford their payments but want a modification of their loan terms on the taxpayer dollar.  


Those in true financial need won't mind, they are most likely already behind on their payments and their credit is destroyed.  I've said it before and I'll say it again, there is no free lunch when it comes to loan mods.  Your credit rating will suffer if you do a loan mod.  Think of a credit report in its simplest form.  It is a tool used by current and past lenders for future lenders to gauge the likely hood of you paying them back on the agreed upon terms.  You know how you can write a review of a product or service on Yelp or Amazon so that others can get a feel for what to expect before they buy?  

Its the same concept but for businesses.  Except that their rating system for consumers (what we call the FICO score) has been around for alot longer, they have specific formulas and guidelines that all reviewers adhere to, there is no subjectiveness involved, and their system is regulated by federal and state laws.


If you had a business lending people money at 6% and your business model and expense structure was based on people paying you back at 6%, then all of the sudden the gov't mandates that you _HAVE_ to allow people to pay you back at 2% (and to incentivize you for doing this they'll pay you a .25% bonus so you're actually getting 2.25% instead of your 6%).  How do you think this would effect your business model?  What do you think you would post about that consumer for future businesses considering lending money to them?


Do we really want a gov't loan mod program that anyone can participate in with no adverse consequences funded with taxpayer dollars?
Update: It is almost impossible to get a clear answer from Lenders on this question.  Called CitiMortgage over the past 2 weeks multiple times to get information on this question.  Every rep gave me a slightly different response.  Now they seem to be pretty consistently referring people to the Credit Bureaus.  Which as anyone who has ever tried to contact a Credit Bureau knows, is pretty much a blow off.  Of the 4 (Equifax, Transunion, Experian and Enovis) I was only able to speak to an operator at 1 bureau Transunion, she told me to ask the lender how they were going to report the loan modification, round and round the circle of confusion goes...

 

 

M. Ben Nicolas
IET Real Estate (Los Angeles County - CA)
Cell: 310 874-1278 
E-mail Ben

 


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