Trail Loan Modifications Trash Credit Report and Credit Score

Carolyn Said of the San Francisco Chronicle wrote an excellent article “Loan modifications often damage credit scores” that covers the reality of the damage that occurs to credit from a loan modification.

Here are some excerpts. You should read the full article for more information

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“Struggling homeowners who get a loan modification to reduce their mortgage payments are often unaware that it can seriously ding their credit score. Moreover, if they don’t get long-term help, the temporary loan mod can bury them in a deeper hole of debt that increases the likelihood they’ll lose their home.

Then, after 10 months, they got a letter from Chase saying they had been denied for permanent help and now owed $44,000 in past-due amounts and fees.

“A lot of people don’t understand that by making the payments due on their temporary loan mod they’re reported as delinquent immediately,” said Margot Saunders of the National Consumer Law Center in Washington. “It’s a huge misunderstanding.”

“A lot of lenders are reporting these modifications as paying under a partial payment plan. FICO regards that status as a serious delinquency,” said Craig Watts, a spokesman for FICO, which writes the software the credit bureaus use to determine scores. “There’s one saving grace if the lender reports the modification as being under the auspices of HAMP, but that does not mean the lender won’t also report the loan as being a partial payment plan.”

Watts said it is a “widespread myth” that short sales and deeds in lieu of foreclosure have less impact on credit scores than do foreclosures.

“Forcing people to be late is standard,” said Maeve Elise Brown, executive director of Housing & Economic Rights Advocates in Oakland. “I have never talked to a (struggling) homeowner who hasn’t been told by the servicer that they cannot do anything for them unless they go delinquent.”

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