The Mortgage Crisis and Your Credit: Loan Modification

The Mortgage Crisis and Your Credit: Loan Modification

by Linda Ferrari June 28, 2009

Foreclosure, Deed in Lieu of Foreclosure, Short Sale, Loan Modification and Bankruptcy can all have long-lasting impact on an individual's ability to obtain credit. Homeowners need to get the facts before making critical decisions that will impact their lives for many years to come. In this series of seven blogs, I'll be examining each of these options in detail so you can get a better understanding of the myths and realities surrounding them and how they affect your credit.

One of the recurring themes in my book, The Big Score, and something I always emphasize to my clients is that being proactive the key to ensuring your credit score is as high as possible! In the case of your mortgage, the way to do this is by trying to renegotiate the terms of your agreement before things get out of control.

Loan Modification

A loan modification is when the lender agrees to modify a part or all of the terms of the original mortgage loan agreement.  This existing note is modified and remains in place.  Changes to the agreement can include: extending the term of the loan, changing the monthly payments, and changing the interest rate to make the loan more affordable and to help the homeowner avoid foreclosure or bankruptcy.

Today, in the wake of the devastating mortgage crisis, loan modifications are extremely common. So much so that a backlog of cases has forced lenders to prioritize their caseloads. This largely means that many homeowners are being forced into default to get their attention. This is unfortunate, because one 30-day late pay can cause a 50-80 point drop in credit scores. 

The good news is that borrowers who choose this option vs. foreclosure or bankruptcy, show that they are exhausting every effort to pay the loan, and the effort will show in your credit scores and history.

How Does a Loan Modification Affect Credit?

A loan modification does not affect a person's credit score as long as the modification is completed before late payments begin. 

What I've seen, is that Lenders will put a note on the borrower's credit report indicating that the loan has been modified. This note does NOT affect the credit score, but may affect future loan approval, depending on underwriting requirements of the lender. 

If you have already incurred late pays on your mortgage, your credit scores will drop from 50-100+ points for those late pays.  And in worst case scenario, Universal Default will kick off like a domino affect, basically equivalent to of every one of your creditors ganging up on you all at once and making your life a living hell.  I talk about in great length in my book, The Big Score.  So it is important to give every effort to negotiating that the lender remove any late pays incurred during the "waiting period" of when you submit your first request for the loan modification to the time of completion.

Here's a tip:  Statistics show that 25% of homeowners who enter into a loan modification will default on their 2nd month under the new plan. Make a deal with the lender to delete all late pays after you have made 3-6 months of on-time payments.  AND GET IT IN WRITING.

No Laws Requiring Lenders To Report To The Big Three

In my recent article The Mortgage Crisis and Your Credit: No Laws Requiring Lenders To Report To The Big Three I give my readers access to significant and powerful information to help them negotiate non-reports with lenders and creditors.

There are no laws in place requiring that lenders and creditors report negative information to the three major credit bureaus. Here's the section of the law from the Fair Credit Reporting Act:

§623. Responsibilities of furnishers of information to consumer reporting agencies [15 U.S.C. § 1681s-2]

(a) Duty of Furnishers of Information to Provide Accurate Information

(7) Negative Information

(E) Use of notice without submitting negative information. No provision of this paragraph shall be construed as requiring a financial institution that has provided a customer with a notice described in subparagraph (A) to furnish negative information about the customer to a consumer reporting agency.

Here's the text from subparagraph (A):

(A) In general. A person who furnishes information to a consumer reporting agency regarding a delinquent account being placed for collection, charged to profit or loss, or subjected to any similar action shall, not later than 90 days after furnishing the information, notify the agency of the date of delinquency on the account, which shall be the month and year of the commencement of the delinquency on the account that immediately preceded the action.

There's more to this story, however. An August 13, 2008 announcement from Fannie Mae & Freddie Mac clearly states that they place NO requirement on how lenders report mortgage default accounts to the credit bureaus. In response to the frequently asked question about how these items should appear on the credit report, the announcement stated:

"For reporting these actions on Fannie Mae loans, we require that servicers report to one of the major credit reporting agencies, but it is our policy NOT to direct specifically how to report various actions."

So if the Fair Credit Reporting Act doesn't require lenders to report negative information at all, or in a specific manner, and the nation's largest buyer of mortgage loans does not require lenders to report negative information at all, or in a specific manner, this leaves the door wide open for negotiating deletions or non-reporting when it comes to short sales and loan modifications and in some instances foreclosures. So I reiterate: NEGOTIATE, NEGOTIATE, NEGOTIATE.

How Long Before You Can Buy Another Home After Loan Modification?

The good news is that there are no guidelines from Fannie Mae & Freddie Mac regarding consideration of Loan Modifications, however, there are rules when it comes to late pays.  So if you have incurred let's say a 60-day late on your mortgage in the last 12 months, then you may be facing a waiting period.  You should discuss this with your mortgage professional.

Recovering Your Credit After Late Pays While Waiting For Your Loan Modification To Be Approved

• My Free Special Report, Save Your Credit - Save Your Life is a great place to start! Click here to learn more.
• My Book, The Big Score - Getting It & Keeping It will give you the knowledge and the tools you need to Recover and Rebuild from any credit crisis. Even if you have great credit now, this book will help insure that it stays that way. Click here to learn more.

In Conclusion

Be proactive in negotiating with your lenders and through loan modification you can potentially save your credit. In my next blog, I'll examine what might be considered the opposite scenario - bankruptcy.