This outcome hasn't been discussed much before but now it's out there for everyone to see. Namely that if a homeowner in distress is successful in using the Home Affordable Modification Program, kicked off in March, to lower his mortgage payments, his FICO score is likely to take a hit. FICO is the commonly-used barometer to assess a consumer's credit standing.
That's because many mortgage lenders report the modification to FICO as such. This means that the original terms of the loan were changed, often for less than the full amount, and any time that happens FICO's existing formula regards that as a negative. The score can drop 100 points and more. A perilous dive.
Under current train of thought, the negative impact is entirely reasonable. By how many points it should impact the score is debatable, however. In this deep recession borrowers that are proactive and seek to work things out before falling behind in their payments ought not to pay a heavy price for it. They are trying to achieve a win-win outcome for everyone. It clearly seems excessive to see FICOs tumble 100 or more points.
Not only that, but consumers that have done this have also generally been unaware of the blow to their credit scores. They only find out about it later when requesting a fresh report. Either the disclosure hasn't been there at all, or was buried somewhere in fine print, the usual industry practice. This can predictably slow down foreclosure prevention efforts to the detriment of the entire economy. That, for the most part due to FICO using an outdated scoring model. It should be quickly revisited to reflect the presently difficult real estate market.
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Provided by:
Esko Kiuru
Mortgage, real estate and apartment industry analyst
www.BluefoxToday.com - syndicated mortgage, housing and property management blog
eskokiuru@gmail.com
My cell: 702-499-1006
Wow, good thinking to post this important information. How long would it take to rebound the 100 points?
Wow what a hit-I'm with you I bet most of the consumers don't know about the hit or how much it will hit their FICO scores.
So important that the public be aware! Hope your Las Vegas market is stabilizing.
Thanks for the info Esko.
It should drop. It is no different than comsumer conseling. If you are having a financial problem and your are getting help to reduce your debt by making the lender lose money there should be some negative impact to you too.
Thanks for supplying us with this vital information on credit scores. We have been subject to a three digit number
Thanks for bringing this to light. I didn't realize that the people that were able to get their loan modified would take such a huge hit on their score! Seems like the loan modification hits them just as hard as a short sale...
Chanda panda
I was curious of the impact of this on a consumers credit score. All things considered, if this actually helps keep them in their home and avoid a foreclosure, the 100 points are a pretty good tradeoff.
Ryan Minick
www.The2MortgageGuys.com
Esko, how do they take a hit on the credit score if they do not go late on the mortgage payment. Are they attaching a code to indicate that a loan modification has taken place???
Monika,
As to recovering the lost points, FICO scoring model may not even have it figured out yet. Good question.
Pat,
Consumers generally not being aware of it is a problem.
Angela,
Spreading the word about this is important.
Neal,
Thanks for coming by. Hope everything is well over there.
Russ,
Dropping is reasonable since the original loan terms were modified, but by how much can be debated.
Harry,
Everyone considering a loan mod ought to be aware of this possibility.
Chanda,
A hit over 100 points seems excessive.
Ryan,
That's one way to look at it.
George,
The lender will report the modification to FICO and its scoring model takes over from there.
Esko,
George's comment highlights an issue. I hear loan modification "specialists" telling prospective "customers" that since they aren't going to be late on payments, it won't affect their credit score. You're right. It's not true.
Mike in Tucson
Mike,
If banks report their loan modifications, and many seem to be doing so, to FICO, it'll affect the borrower's score, often negatively.