Friday, July 17, 2009

Loan modifications dropping FICO scores

Bloomberg has a story up on loan modifications effect on FICO scores. While many homeowners FICOs are trashed anyways due to late payments, those hoping to preserve a high FICO and get a loan modification might not realize that the payments will reported as less than the agreed amount and reduce the FICO score. This does represent a higher risk to lenders and is entirely appropriate but some might not realize there credit will be affected adversely.

From the article (emphasis added):

Victor Stern thought his money troubles were over when he got approval to modify his home loan. Then his credit score dropped 121 points.
...
“There should be clear disclosures so consumers understand this is a major hit on the credit score,” said Evan Hendricks, Washington-based author of “Credit Scores & Credit Reports.” “There’s no sugar-coating the reality of the negative impact.”
...
We view an account that has been settled or renegotiated for less than the full amount as a negative because historically consumers on reduced payment plans represent a greater risk,” said Ethan Dornhelm, a principal scientist at FICO’s San Rafael, California, office. The size of the impact may be more for borrowers with higher credit scores, he said.
...
“If you’re a lender, you want to know that a borrower had to have a loan modified to keep up with payments,” said Greg McBride, senior financial analyst at Bankrate.com, who is based in North Palm Beach, Florida. “It’s not unfair that a loan modification impacts a credit score since the borrower didn’t meet the original obligation.”

3 comments:

junkyard said...

I would say that is fair.

Noz said...

That is the least that should happen to these people.

dafox said...

I think any principal reductions should be marked as a sale so it can be used as comps for nearby sales.