NW Loan Modification Center

Link: http://www.nwlmc.com

Bill Black - CMP

Sunday, November 1, 2009

“I have perfect credit and I am not late on my mortgage but I really need to get a lower payment so if I was offered a federal home loan modification how will this affect my credit score?”

This is currently one of the most asked questions states Kathleen Jamal, Operations Manager at the NW Loan Modification Center in Vancouver, Washington that specializes in default solutions with an emphasis on the Home Affordable Modification Program (HAMP). One of the key processes that NW Loan Modification Center includes in their home modification program after the modification has been implemented is a credit analysis to verify that the credit agencies have the most accurate information based off the new guidelines.

Up until today, lenders reported mortgage modifications various ways. Some reported them as paid as agreed. But a lot were reporting them as partial payments, which have a very negative impact on a person's FICO score. "That is a serious derogatory, in the same category as a foreclosure or short sale," says FICO spokesman Craig Watts.

One recent client from Vancouver, Wa. says her FICO scores dropped from the mid-700s to the low-600s after her lender put her on a trial modification and reported it as a partial payment. On the plus side, the trial modification has cut her monthly payment by $1,300.

New reporting plan

Starting today, lenders have a new, more benign way to report government-sponsored loan modifications.

Under guidelines put out by the Consumer Data Industry Association, lenders should report them as a "loan modified under a federal government plan," says Norm Magnuson, a spokesman for the association, which represents credit bureaus.

FICO - the leading provider of credit scores - will ignore this new notation for the time being. 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," says FICO spokesman Craig 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 says.

Starting today, 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 says. 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.

Caveats

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," says Tom Kelly, a spokesman for Chase.

The new guidelines won't help people who have already modified a loan, although a lender could, at its discretion, apply them retroactively, Magnuson says.

Magnuson says the new category was created at the behest of the U.S. Treasury Department, which did not return my request for comment.

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.

Consumer advice

Should borrowers 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," says 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 answers to both questions are yes, Ulzheimer would proceed with a modification, knowing it could dent your score if FICO ultimately treats it negatively.

Robert C. Russell, 20 year bankruptcy attorney and owner of the NW Loan Modification Center, says, "You have to set priorities: Do you want to keep your house or your perfect credit score? Why do you need a perfect score? So you can get more debt?"

We offer classes and seminars on Default Solutions- from Home Loan Modifications to Short Sale negotiations. For more information please e-mail info@nwlmc.com or visit us at www.nwlmc.com