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FICO score can take a hit following Home Affordable Modification Program

By
Services for Real Estate Pros

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 That, for the most part due to FICO using an outdated scoring model.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.  

 

Posted by

_______________________________________________________________________________

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

Comments (20)

Monika Depalo
GAFF'S REFERRAL'S INC. - Port Orange, FL
REAL ESTATE Agent/Stager

Wow, good thinking to post this important information.  How long would it take to rebound the 100 points?

Jul 17, 2009 12:23 PM
Pat Champion
John Roberts Realty - Eustis, FL
Call the "CHAMPION" for all your real estate needs

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.

Jul 17, 2009 12:25 PM
Angela Clark
Tony Clark REALTORS - Owensboro, KY
CRS, Realtor, Broker

So important that the public be aware!  Hope your Las Vegas market is stabilizing.  

Jul 17, 2009 12:58 PM
Neal Bloom
Brokered by eXp Realty LLC - Weston, FL
Realtor CRS-Weston FL Real Estate

Thanks for the info Esko.

Jul 17, 2009 01:26 PM
Russ Ravary ~ Metro Detroit Realtor call (248) 310-6239
Real Estate One - Commerce, MI
Michigan homes for sale ~ yesmyrealtor@gmail.com

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. 

Jul 17, 2009 01:30 PM
Harry F. D'Elia III
WEDO Real Estate and Beyond, LLC - Phoenix, AZ
Investor , Mentor, GRI, Radio, CIPS, REOs, ABR

Thanks for supplying us with this vital information on credit scores. We have been subject to a three digit number

Jul 17, 2009 01:38 PM
Chanda Barrick
Keller Williams Indy Metro Northeast - Indianapolis, IN
in referral

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

Jul 17, 2009 01:47 PM
Ryan Minick
LeaderOne Financial Corporation - Kokomo, IN
The 2 Mortgage Guys

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

Jul 18, 2009 01:01 AM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

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???

Jul 18, 2009 01:18 PM
Esko Kiuru
Bethesda, MD

Monika,

As to recovering the lost points, FICO scoring model may not even have it figured out yet. Good question.

Jul 20, 2009 06:20 AM
Esko Kiuru
Bethesda, MD

Pat,

Consumers generally not being aware of it is a problem.

Jul 20, 2009 06:21 AM
Esko Kiuru
Bethesda, MD

Angela,

Spreading the word about this is important.

Jul 20, 2009 06:24 AM
Esko Kiuru
Bethesda, MD

Neal,

Thanks for coming by. Hope everything is well over there.

Jul 20, 2009 06:25 AM
Esko Kiuru
Bethesda, MD

Russ,

Dropping is reasonable since the original loan terms were modified, but by how much can be debated.

Jul 20, 2009 06:28 AM
Esko Kiuru
Bethesda, MD

Harry,

Everyone considering a loan mod ought to be aware of this possibility.

Jul 20, 2009 06:30 AM
Esko Kiuru
Bethesda, MD

Chanda,

A hit over 100 points seems excessive.

Jul 20, 2009 06:31 AM
Esko Kiuru
Bethesda, MD

Ryan,

That's one way to look at it.

Jul 20, 2009 06:33 AM
Esko Kiuru
Bethesda, MD

George,

The lender will report the modification to FICO and its scoring model takes over from there.

Jul 20, 2009 06:34 AM
Mike Jones
SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) - Tucson, AZ
Mike Jones NMLS 223495

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

Jul 20, 2009 11:00 PM
Esko Kiuru
Bethesda, MD

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.

Jul 22, 2009 02:57 PM