Wednesday, August 12, 2009

Damage To Credit Rating A Consideration For High-Score, Non-Delinquent Homeowners When Seeking Loan Modifications

Homeowners who are current on their mortgage loan but nevertheless are seeking to modify their loans to lower their house payments may wish to consider the prospect of how badly their credit scores will be creamed if they go through with a loan modification, based on a recent story on
  • A recent Bloomberg article [...] addresses a topic that deserves serious follow up. The article accurately identifies that loan modifications could damage your FICO credit scores, if they are reported to the credit bureaus using the new reporting guidelines set up by the credit bureaus and their trade organization, the Consumer Data Industry Association (CDIA).


  • The issue at hand is how very large mortgage lenders, namely Citigroup, Chase, and Bank of America, may report mortgage loan modifications to the credit reporting agencies and, secondly, how that credit reporting impacts the consumers’ FICO® credit scores. According to the Consumer Data Industry Association, the credit bureaus have agreed to guidelines that loan modifications will be reported as a “Partial Payment Plan.”

  • The problem with this decision is that FICO credit scores interpret the notation of a “Partial Payment Plan” as negative. [...] How much [consumers] scores decrease will depend on from where their scores started. A score of 550 isn’t going to plummet the same number of points as a score of 750. [...] This Partial Payment Plan classification appears to box in tens of millions of consumers who are stuck in upside-down mortgages.

For more, see Credit Reporting Industry's Decision on Loan Modifications Boxes in Consumers.

For the Bloomberg News article, see Cheaper Mortgages Trigger Lower FICO Scores for On-Time Payers.