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July 17th, 2009

Loan Modifications Are Hurting Credit Scores

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The latest thorn in the side of President Obama’s loan modification program is that some participating borrowers could see their credit scores plummet:

Banks, including Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp., report the loan modifications to credit bureaus. The adjustments can lower credit scores because of the way the FICO formula, the most widely used by U.S. lenders, works.

“There should be clear disclosures so consumers understand this is a major hit on the credit score,” said Evan Hendricks, Washington-based author of “Credit Scores & Credit Reports.” “There’s no sugar-coating the reality of the negative impact.”

Borrowers might decide against participating when they learn what the program can do to their credit scores, said Jack Guttentag, founder of the Web site mtgprofessor.com and professor of finance emeritus at the University of Pennsylvania’s Wharton School. That could limit the number of modifications and result in more foreclosures, Guttentag said.

But the experts say it mainly depends on your lending institution. The Consumer Data Industry Association (CDIA), which represents the credit bureaus, has guidelines for how lenders should report loan mods. According to the CDIA, borrowers who are in the trial period of their modification should be reported as current, not delinquent. However, the way each private lending institution reports the new terms of the loan workout is different. FICO hasn’t decided whether or not to investigate if penalizing borrowers for loan workouts is legitimate.

Financial expert Gerri Detweiler says that, while a loan mod can hurt your credit score, it won’t impact it as much as a foreclosure, which can stay on your credit report for seven years, and could cut your credit score by 200 points.

Whether modifying through the government’s program or through a private lender, be sure to ask how the modification will impact your credit score.

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15 Responses to “Loan Modifications Are Hurting Credit Scores”

  1. Joan Bannister Says: July 18th, 2009 at 7:30 am

    It appears that consumer and bankers are in a catch-22. Consumers can not really receive mortgage rate reductions during refinancing in the downward trend of our US economy. Equally disturbing, the Bankers financial rating will suffer if they provide lower rates for refinancing consumers.

    If Obama economics is truly trying to implement strategies to effect positively the economic trends they need to encorporate modifications on both sides of the lender/lendee spectrum. How about lowering the Mortgage rates and rewarding the banks that allow for those refinanced homeowers to do just that? Consumers in panic mode do not shop! Our economy is based on “spending.” If the consumer preception is that they technically do not have “available spending $’s,” guess what? This is a vicious circle. Something has to give. This is where the government comes in. let’s remember FDR and forget the “Clinton economics” and see if our economy does not rebound!
    Respectfully,

  2. Tim Manni Says: July 18th, 2009 at 5:58 pm

    Hey Joan,

    Thanks for commenting. Obama’s program does provide monetary incentives for lenders, but I think they are so swamped, and as you mentioned, even though there are incentives, some lenders may feel they’re not in their best interest.

    The viscous cycle point is very valid, it’s so true. I guess the stimulus was meant to help in that regard, but it isn’t working just yet.

    Hope to her from you again soon,
    Tim

    Where do we go from here?

  3. Norma Watson Says: July 19th, 2009 at 12:00 pm

    What would hurt my credit score the most? A modification or a foreclosure?

  4. Tim Manni Says: July 19th, 2009 at 3:30 pm

    Hey Norma,

    “Financial expert Gerri Detweiler says that, while a loan mod can hurt your credit score, it won’t impact it as much as a foreclosure which can stay on your credit report for seven years, and could cut your credit score by 200 points.” Gerri Detweiler says foreclosures are more damaging to your credit score and report.

    Thanks for commenting,
    Tim

  5. Mitch Says: July 29th, 2009 at 4:14 pm

    Personally, I think FICO scores are going to be a thing of the past because the way they do things is so arbitrary. I know a guy who couldn’t get a mortgage refinance because they said he didn’t have a job, but he had over $750,000 in cash sitting in their bank. That’s just silliness, and it’s starting to cave in.

    When you have financial analysts telling people who are out of control with their spending NOT to cut up their credit cards because it could affect their credit score, you know the world’s gone nuts.

  6. Loan Modification CA Says: July 31st, 2009 at 7:43 am

    Hi,
    I read your blog and i feel that the information given here about “Loan Modifications Are Hurting Credit Scores” it’s helpful to us.

    Thanks for sharing ….

  7. Tim Manni Says: August 3rd, 2009 at 11:25 am

    Mitch,

    Good points again. How much longer do you think FICO scores will be around? It does seem like the system isn’t working the way it should…Any suggestions for a alternative?

    Sorry it me so long to respond, I was on vacation last week.

    -Tim

  8. Tim Manni Says: August 3rd, 2009 at 11:56 am

    No problem, thanks for reading!

  9. Cathey Hargrove Says: August 6th, 2009 at 10:37 am

    My 55 year old husband lost his white collar consulting job, making about 80K, in March; first time without a job since college. With that reduction in income, and the fact that we live in an area that has been hit pretty hard by the recession, I decided to talk to my servicer, Citimortage, about some type of workout. We had a FICO of 801 in April 2009 and we’ve had a score that high for years. I was told we were eligible for a HAM modification as we have a Freddie Mac loan and seemed to fit the guidelines for the program. I am responsible with money and protective of our credit score, so I was careful to ask the Citi rep how this would impact my credit. I was told it would be a ’soft hit’. As you have suggested in your article,Citi reported us ‘delinquent’ to the credit bureaus even though we went into the trail current, despite the CDIA guidelines. Our score went from 801 to 635. The reprecussions have been repressive. My HELOC (Citibank), which I’ve always paid on time, suspended my account. My business credit card with BOA was reduced to the balance owed, from 10K to $3,800. I needed to look into getting a small working capital loan for my business so we could actually try to stay solvent, but that isn’t going to happen with a 635 instead of an 801. By the way, I was paying BOA on time and far in excess of the minimum. My husband is currently working 3-4 parttime jobs to bring in funds so we can keep paying our bills on time. I don’t think you can lump all the mods taking place right now into the category of people who made bad spending decisions and are now paying for it. I only thing we did ‘wrong’ was lose good income in a recession.

  10. Tim Manni Says: August 6th, 2009 at 12:43 pm

    Cathey,

    Wow, that’s far from a “soft” hit. Have you spoken to Citi, telling them of the inaccurate info you were provided? By the sound of it you and your husband seemed quite proud of that credit score, and you should, maintaining a score above 800 is something to be proud of.

    We’re truly sorry to hear about your misfortunes. Would you be in better financial shape if you hadn’t modified, or was it necessary? Do your best to rebuild your credit score and good luck.

    Thanks for sharing your story,
    Tim

  11. Megan McKenzie Says: August 8th, 2009 at 1:11 pm

    They bailed out wall street but kicked homeowners to the curb with no place to live.

    I am trapped in an interest only loan with America’s Servicing Company (Wells Fargo in sheep’s clothing) who obstinately won’t even send me the paperwork. If you are behind on payments they foreclose even IF they agree to a loan modification. They are unprofessional and unscrupulous. The government is doing NOTHING BUT….

    They bailed out wall street and kicked homeowners to the curb with no place to live. They are taxing the middle class to death. We have been abandoned.

    It is obvious this administration will do ANYTHING to help big business but will not help hard working Americans who want to stay in their homes and make their payments. For one thing the 31% of gross rule is absurd. For those in trouble, especially singles, payments may already be at 31%. This is the case for me. But the catch is I’m single so I get taxed to the max eroding my gross salary. MY PAYMENT IS 55% OF MY NET but they don’t take that into consideration.

    The servicing companies get kickbacks for loan mods. The banks get bailed out. The TARP benefited everyone but the homeowner. President Obama has let us down and now he wants us to pay for healthcare.I would consider it as a good idea but with facing homelessnes how can I consider a new tax boondoggle?

    Obama could have used TARP funds to bailout homeowners but stiff armed us away with complicated rules and regulations that no one can qualify for. And, now I read this article about the FICO score ding for a loan mod. I’m crying my eyes out. I’m too old to start over and the stress is killing me.

    I started a blog to collect stories to print out and mail to Obama. I figure with a big pile, he would pay attention.

    Go to:

    obamaloanmod.blogspot.com

    and post your story.

    Thank you.

  12. Rockon Says: September 1st, 2009 at 6:47 am

    I am trapped in an interest only loan with America’s Servicing Company (Wells Fargo in sheep’s clothing) who obstinately won’t even send me the paperwork. If you are behind on payments they foreclose even IF they agree to a loan modification. They are unprofessional and unscrupulous.I was on vacation last week.

  13. Tim Manni Says: September 1st, 2009 at 1:55 pm

    Rockon,

    We’re sorry to hear about your situation. It’s a hollow assurance, but you’re not alone.

    Best of luck, keep us posted on your situation — maybe your story can help others going through something similar.

    Thanks,
    Tim

  14. em Says: November 13th, 2009 at 1:56 am

    My Aunt and Uncle moved to Florida 2006. They bought a house at what they believed to be a significant discount, but the market is so bad that their mortgage is now upside down anyway. Every other home in their over 50 community is abandoned by owners who paid as much as double what they paid for their home. They decided to try for the HAMP before they got into any trouble. Filled out all the paperwork and received a letter telling them that their submission was incomplete without any note as to what was missing. She called their mortgage company and the rep went through a laundry list of problems, each one more bogus. Yes they had received validation that 13 pages had been faxed. Yes she wrote her name and Account Number on every single page. Question after question only proved they were just stalling her. Then they claimed that she needed to provide them updated income amounts and sources. She told them they were as up to date as they could be, they hadn’t changed since they faxed the paperwork a week earlier. Then oddly they hung up on her. My Aunt was furious. They are not late on their payments and have always had impeccable credit – they were just being proactive by acting before they became deliquent.

    Later that day her cousin came over with a story about her son’s girlfriend who some time ago called her Mortgage company to inquire about the HAMP – she never even submitted any paperwork. Today she had tried to use her credit card while shopping and was told that the card had been canceled. When she investigated the canceling and her credit score she found out it was due to her HAMP remod – which she didn’t even have.

    My Aunt is now afraid to even go any further but is in a panic thinking that her score has already been affected.

    Is this even possible? Why isn’t this being more widely reported. Where are the warnings? Where are our elected officials? We’re bailing these companies out with tax payer money, listening to them whine about all their problems while they scheme behind closed doors to find ways in which to screw the system, take advantage of their customers and exploit every possible loophole.

    I told my Aunt to call her Senator and get his office involved. This is just mind boggling.

  15. Tim Manni Says: November 13th, 2009 at 11:13 am

    Em,

    Wow, even I haven’t heard this scenario before. Can you tell me who her lender is? I have a guess…

    We’ve have only ever heard of credit scores being affected once they are approved and begin their mod (or trial mod). If your Aunt has been denied, or if she hasn’t yet been approved, her score should be alright (should is the key word here).

    I’m really interested to find out which bank your aunt and your aunt’s cousin’s son’s girlfriend are dealing with.

    Please keep us posted,
    Tim

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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