Loan Modification

Loan Modifications and Credit Scores the Dirty Truth

By Andrew

Do loan modifications affect your credit score? Should they? Why should you care?

Credit scores are a numerical value credit bureaus place on a borrower as a way of measuring their reliability. It is in the interest of lenders to report any delinquent activity to the credit bureau. In fact some would argue that it is in the interest of everyone as delinquent borrowers make loans more expensive for everyone by forcing lenders to increase interest rates to pay for bad loans. This is why potential borrowers that have bad or low credit scores find it harder to get loans approved or have to pay a premium for the privilege.

Borrowers that don?t make one or various payments are marked by a special code that informs other lenders of the situation. Borrowers that are granted a reduction of their loan balance or monthly payments due to financial difficulties are also marked with a special code called AC. This code can reduce the credit score of a borrower by anything between 30 and 100 points and tells lenders that the borrower had only made a partial payment.

The problem arose when troubled borrowers entered the loan modifications sponsored by the government and were granted loan modifications without ever having missed a payment but were still marked with AC as it was the closest fit in the ?system?.

The Obama Administration felt it was unfair to harm the credit scores of borrowers that sought a loan modification. Therefore a new code ?CN? was thought up which will not have an impact on credit scores for now.

The question is if this will change. Will the code CN affect the credit score of borrowers in the future? This is still to be determined. It will depend on if FICO, the company behind the most popular credit score formulas, decides the appearance of CN in a credit report increases the chances or is predictive of delinquent behavior.

It is worth noting that borrowers that enter into a loan modification are asking for a reduction of their loan and are therefore not wonderful news for lenders that are looking for reliable customers. It is not at all clear to me why it is wrong that their credit score is somewhat affected.

However what is certain, and this is what worries the Administration is that borrowers with a good credit history will shy away from a loan modification that threatens their credit.  Lenders might argue that borrowers who feel they have a choice and prefer not to enter into a loan modification that would damage their credit don?t really need it and can very well pay the full loan, thank you very much.

How you feel about the matter may very well depend on which side of the fence you are looking from. The Obama Administration wants to give HAMP the best chance possible and is eager to erase any bad publicity the program attracts even if this means fudging credit reporting codes. Whether these measures are long lasting or not will depend on the performance of borrowers that enter into a loan modification, it must be said at this stage that things don?t look all that good.

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Related posts:

1. Are Credit Scores Obsolete?
2. Loan Modifications and Mortgage Modifications Can They Affect Your Credit Score
3. Wachovia Loan Modifications Help Only 3% and May Damage Your Credit Rating

1. Are Credit Scores Obsolete?
2. Loan Modifications and Mortgage Modifications Can They Affect Your Credit Score
3. Wachovia Loan Modifications Help Only 3% and May Damage Your Credit Rating

Full post as published by Blown Mortgage on January 08, 2010 (boomark / email).