Trial Modifications and Your Credit Score

I'm sure we have all heard about the Trial Modification program where the homeowner makes a reduced mortgage payment for a specific period of time - usually 3 Months.  If those payments are made timely and the requested documentation comes in to the Lender as agreed, the modification becomes long term.

What is not so widely known or understood is the impact of this new 3-Month Trial Modification on the borrower's credit score.  As tricky as credit scores are to understand, this new dynamic adds a whole other dimension to this complex scenario.

I have heard that credit scores are likely to suffer 20-30 points during the temporary Trial Modification period, but can be restored when the modification is finalized.  I heard that FICO interprets these reduced payments as the Borrower having a problem with their payments, so there's a higher level of risk.

This negative impact to their score could be erased for homeowners who successfully complete the three months trial phase.  However, a final modification won't eliminate credit hits from late payments.  And the outcome depends on how the lender reports the event, a factor in all credit reporting.

My Client, who has 700+ FICO scores was really stressing at the prospect of dinging her credit score to accomplish her modification with her Lender.  After doing a little research, she ran across some guidelines that she sent over to me to review: 

‘If your loan is owned or guaranteed by Fannie Mae, see page 12 of Fannie Mae Servicing Guide Announcement 09-05R for information about credit reporting for HAMP-modified Fannie Mae loans. If your loan is owned or guaranteed by Freddie Mac, see page 5 of Freddie Mac Publication 800 for servicer instructions re: credit reporting of modified loans. If your loan is NOT owned or guaranteed by Fannie Mae or Freddie Mac (a "GSE loan"), see page 22 of "HAMP Servicer Supplemental Directive 09-01″ for information about credit reporting guidelines for HAMP modified non-GSE loans. All three publications state that borrowers who are current when they enter into the trial period and make payments by the 30th day of each month, report as current, but on a modified payment. Borrowers who are delinquent when they enter into the trial period or do not make payments by the 30th of each month, report according to borrower's delinquency and workout status'.

I suggested she send that information over to the Lender doint her Trial Modification since it seemed to contradict what they had been telling her.  After receiving the information, her lender reviewed it and contacted her agreeing that they would not need to report her loan as delinquent.

If you have Clients in this same situation, I would suggest forwarding these federal guidelines directly to the lender and pointing out to them that they are not in compliance these guidelines by reporting a 30-day rolling late during the Trial Modification period.

If they have already been reported as late during their Trial Modification period, this may give them the ammunition to dispute it.