We wrote about the affects of loan modifications and credit scores on May 18th; you can read the full article here.  As the government programs continue to progress and more consumers try to use them, additional information and some results are coming forth.

On July 17, 2009, Alexis Leondis with Bloomberg.com wrote an article about a North Carolina homeowner whose credit score dropped 121 points after going into the three month trial period of a loan modification.  The Home Affordable Modification Program began in March to reduce mortgage payments for homeowners that are already delinquent or in danger of defaulting. The lower-cost, modified loans are subject to a three-month trial period.

The Consumer Data Industry Association, which represents credit bureaus, has guidelines for lenders to follow when they report loan adjustments on consumer credit files.  These guidelines state that homeowners in the trial period should be reported as current and on partial payment plans if they are not delinquent with payments. A new reporting classification will be created in November that specifies the borrower received a loan modified under a federal government plan.

FICO, creator of the FICO scoring formula, says that an account that has been settled or renegotiated for less than the full amount is viewed as a negative because historically consumers on reduced payment plans represent a greater risk. However, the size of the impact may be more for borrowers with higher credit scores. Additionally, FICO may study whether penalizing borrowers for loan workouts is still valid as more changes are completed under the Obama administration’s housing plan.

WHAT TO DO

When considering a loan workout, find out the exact terms of the agreements, including whether there is a permanent or temporary reduction in the monthly payments. 

Barry Zigas, director of housing policy at the Consumer Federation of America, states that consumers should be wary of signing a waiver of rights and recommends always working with nonprofit housing counselors.

Ask the lender if the loan modification will be through the government program or the bank’s own program.

Inquire about how the changes will be reported to the credit bureaus.

Get everything in writing!  If the lender tells you something in person or over the phone, request an email or fax confirming what they said.  Be sure that all dates and deadlines are included in it.

Ask questions.  If something seems out of place or is confusing, take the time to ask about it.  If the person you are working with does not know, ask them to check with a supervisor or someone else who does know the answer.  You are entitled to know the details about everything, especially as it pertains to your home and your financial well-being.