THE IMPACT OF LOAN MODIFICATIONS ON CREDIT SCORES

by 07 Apr 2009
by John T. Bauer, First American CREDCO John T. Bauer is First American CREDCO?s executive vice president of business development, sales and marketing for the company?s mortgage business unit. Without question, the issue of loan modifications is top of mind among servicers and consumers alike, especially since the March 4, 2009 announcement from the U.S. Department of Treasury regarding the new Home Affordable Modification Program. The new Treasury Guidelines have servicers moving faster than ever to mobilize resources, scan and evaluate loan portfolios, and take proactive measures with their customers to salvage distressed mortgages. For troubled homeowners, the new Program is inspiring hope by offering the prospect of helping them get into affordable, long-term mortgages. But considering the multiple variables that are factored in to loan modifications, such as interest rate reductions, amortization term extensions and even principle forbearance, the Program is also raising some key questions. Mainly, ?What impact, if any, does a loan modification have on credit scores?? Loan Modifications: Nothing New It?s important to be reminded that loan modifications are not a new phenomenon. What is new is that you?ll likely see a significant increase in the volume of loan modifications, and the appearance of short sales and distressed refinances appearing on consumer credit report files, as a result of the new federal guidelines. The Consumer Data Industry Association (CDIA, the trade organization of the credit reporting industry) provides reporting guidelines for loan modifications that, to date, haven?t changed. Essentially, whatever changes are made as a result of a loan modification, such as loan amount, interest rate, term of loan or monthly payment, will appear ? as they do now ? on a credit report. CDIA Guidelines for Updating Credit Reports after a Loan Modification If the original Mortgage Account Number and Date Opened are retained, then modify the amounts and terms as per the renegotiated agreement. The fields that may be changed on a credit report in the wake of a loan modification include:

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