Loan Modification Reporting Changes

11.03.09
By John Ulzheimer

Loan modifications have become all the rage in late 2009. Actually, let me rephrase that. The idea of loan modifications has become all the rage. Loan modifications were supposed to be the latest and greatest attempt to save the mortgage environment. The problem, among other things, is that a loan modification can lower your credit scores. And while homeowners should probably forget about their credit for a while when trying to save their home, it's hard for them to do so.

That's why November 1^st, 2009, brought with it good news for consumers who want to modify their mortgages without lowering their credit scores. That was the first day that a new way of reporting a loan modification to the credit bureaus became available to mortgage lenders. From this point forward, mortgage lenders can report a loan modification as "Loan Modified Under Federal Government Plan." This new way to report a loan modification does not have any negative impact to a consumer's FICO credit scores.

Keep in mind, however, that this new credit reporting guideline only applies if the consumer seeks a loan modification under the Making Home Affordable plan. If you choose a loan modification program that is not a government plan, you run that chance of ending up with lower credit scores because of the very damaging "partial payment plan" reporting guidelines. A partial payment plan statement on your credit report is considered seriously negative and can do significant damage to your credit.

The news isn't all good, however. The only reason the new reporting guidelines do not damage your credit scores is because FICO, the company that created the FICO credit score, has not had a chance to include the new status in their credit score development processes. If, in time, they determine that people who have this "Loan Modified Under Federal Government Plan" status on their credit reports are an elevated credit risk, they can choose to modify their credit scoring models to consider it negative. Of course, if they determine that consumers who have this on their credit reports are not an elevated credit risk, they will probably do nothing. Only time will tell.

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Good news for consumers who want to modify their mortgages without lowering their credit scores.