Mortgage Modifications Will No Longer Hurt Your Credit Score

During these troubled times a whole lot of people are having to turn to mortgage modifications in order to stay in their homes. As the recession has marched on and our financial culture has changed many people have lost their homes. The government realized that this was a major problem and launched the Home Affordable Modification Program. This program allows independent companies to pursue a mortgage modification for individuals so that they don’t lose their home.

The Obama administration’s goal is for no American to lose their home due to foreclosure. This is a fairly lofty goal but many companies are trying to help individuals in this situation. One such company is C.A.R.E. Helps, A non profit company helping people with mortgage modification under the government’s plan. Gary Boghosian, a mortgage mitigation specialist with C.A.R.E. Helps, sums up their purpose as “Our number 1 goal is to help people stay in their homes, we do this by reducing payment structure and in some cases modifying terms of the loan”. Companies like this are providing a valuable service and I applaud them for their efforts on behalf of consumers.

This mortgage modification process is fairly new, and one of the chief complaints about it had been the damage it does to your credit score. Fortunately for people, FICO was listening and starting today has adapted a new reporting procedure to address the effect the program has on your credit score. The San Francisco Chronicle has a great article entitled “FICO says New Mortgage Changes Won’t Hurt Score”, that details the new approach.

The reason that mortgage modifications had been hurting people’s credit scores had been due to the way that companies were reporting them. Previously companies would report the new payments as a “partial payment”. This indeed has a negative effect on the person’s credit score. That was not entirely an accurate portrayal of the payment as the plan had simply been modified. FICO recognized this and decide to change that.

Starting today, lenders have a new, more benign way to report government-sponsored loan modifications.

Under guidelines put out by the Consumer Data Industry Association, lenders should report them as a “loan modified under a federal government plan,” says Norm Magnuson, a spokesman for the association, which represents credit bureaus.

The new designation of reporting it will not have a negative impact on the person’s credit score for at least a year while FICO examines the effect that mortgage modifications have.

FICO’s whole goal is to provide an accurate representation of a person’s risk to creditors. Since the mortgage modification program is a new one, FICO does not have the necessary data to determine just how this affects a person’s risk. In order to gauge this affect they are going to take a year to gain this information. After that they will be able to determine just how risky people who undertake this program are in regards to new loans.

“Once there is enough documented performance for people who went through (a federal modification), we will be able to assess the accumulated data to determine how predictive it is,” says FICO spokesman Craig Watts. “The analysts prefer having at least a year’s worth of performance data” before making any changes to its credit-scoring formula.

Under the association’s guidelines, if a person is current with his mortgage payments before and during a trial modification period (typically three months), the lender is supposed to report it as current, Magnuson says.

Starting today, if the modification is approved after the trial period, the lender adds a comment that it was modified under a federal plan instead of the dreaded “partial payment.”

That does not mean that a mortgage modification won’t eventually hurt a person’s credit score, but it is good news in the short term. People entering into a mortgage modification right now will see neither a positive or negative impact on their credit score.

I have nothing but praise for FICO and the way that they have addressed this new program. It seems that they are committed to providing the most accurate view of a person’s risk, and are willing to take a wait and see attitude as to how the program affects that. It really shows that FICO does have a human side. One negative aspect of the mortgage modification program has now been removed and the program can continue to progress towards its goal of keeping people in their homes.