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.
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“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.”
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“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.
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“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.”