While a loan modification may save your house, currently it can be disastrous for your credit. This is because many lenders and loan servicers report loan modifications that they have accepted and approved to the credit bureaus as “partial payments” so that the borrower’s history reflects the fact that they were not able to make payments to which they originally committed. However, a new bill in the House of Representatives introduced by Jackie Speier, a democrat from California, would change this.
Speier introduced legislation yesterday that would “shield” borrowers who successfully navigated the home loan modification process so that their credit is not damaged. She believes that this will encourage people to deal with their mortgage issues rather than strategically defaulting or simply succumbing to repossession. Given that loan modifications are a mandatory process for many homeowners, even if they do not want to modify, but wish to pursue another form of resolution on their property debts, this does not seem unreasonable to me. However, it needs to be managed correctly so that the process is reflected in some manner on credit history. Otherwise, in the future lenders will not have access to all relevant information when they are deciding whether or not to loan to a particular individual.
Do you think loan modifications should ding your credit score?
Thank you for reading! Your comments and questions are welcomed below.
Because loan mods are a joke I do not think it matters very much. Such a tiny percentage of people applying for loan mods are approved and the vast majority of loan mod schemes are little more than a scam, this bill seems like just another part of the scheme not an answer to the reality of loan modifications. For even fewer if it passed, is it really going to matter as most loan mods still end in foreclosure.
I do not think a loan mod should adversely affect credit. It doesn’t reflect a poor payment history necessarily but rather a change in circumstances, usually reduced income. If a person was late or missed mortgage payments prior to the mod, those stay on the credit report giving a lender accurate info. Future loans will be based on current income and debt so there is no increase in risk to subsequent lenders.
If a loan has been modified, that means the contract between borrower and lender has been changed by mutual agreement. To then report payments as “partial” is inaccurate and unfair.
They should use this same legislation for all credit items and
not just home purchasers. I am sure all credit users would like
this benefit and should file a class action law suit for
discrimination if they don’t get same benefit! When will this
slippery slope of letting people out of their personal
responsibility, stop? Never, as we race to the economic abyss!
Credit scores should reflect past credit behavior, period. They should not be used as bribes to direct future credit behavior. The properties tjat are candidates for strategic defaults are underwater–equity is gone, and is not coming back any time soon. So the lenders are going to take a hit. The only question is how they treat the underwater owners. If they want to avoid strategic defaults, they should do loan modifications that reduce the principal to reflect current market values. But they seem to want to punish the homeowners. I’m guessing the lenders would, on average, come out a little bit ahead if they took this route, versus a forecxlosure and resale. Yes, the underwater homeowners were fooolish and irresponsible–there was no logical or historical reason to assume prices would keep going up 20-30% a year. But the lenders had to be making the same assumption, so they were foolish and irresponsible, too. There’s no good solution to this government-policy-induced mess. So what solution will minimize the lender’s loss and the homeowner’s pain the most?
1- contracts should be honored by both parties to an agreement
2- if a party defaults, the consequences of default are clearly set forth in the note and security agreement.
3- if the parties choose to negotiate a settlement, altering the terms of the agreement, no problem
Should modifications ding your credit score? Let’s put it this way… if you want the benefit of a reduced payment, reduced rate, reduced balance, or any variation thereof, the “cost” of such an agreement should be an accurate accounting on the credit history for this fact. It’s up to the credit scoring company as to the affect on a “score”.
We are fast becoming a nation of people with little to no sense of personal responsibility. If you can not live up to your agreement, even if you’re a “victim” of circumstances, is that not something future credit grantors should know?
What about those who never did default.. should their record be considered “the same” as someone who did not meet the terms of their agreement?
Economic reversals are a part of life.. but if we remove the consequences of default.. we can be assured that the fabric of trust that helped build this great nation will come apart at the seams and fewer and fewer people will be able to obtain credit.
We must re-evaluate this notion that defaulting on a note or contract is somehow an honorable way to conduct business.. If you can’t perform- no matter the excuse- take it like a man and at the very least accurately report the setback on the credit record. None of this politically correct shifting or avoiding personal responsibility should be glossed over. It makes all the conservative people- who are careful about the risks they take on- shoulder the cost. How is that equitable, or even desireable.
I think credit should be forgiven to those who recieved loans that homeowners were really not qualify to get in the first place.