In another blow to Obama’s HAMP mortgage loan modification program it has come to light that these modifications can damage the borrower’s credit score. This had previously not been reported to many homeowners’ seeking relief through the program.
The damage occurs when a borrower enters the trail period of a loan modification, negotiating a reduced payment with their servicer. Although that new payment is agreed upon by all parties, servicers have been reporting these reduced payments as less than the required payment. This results in mortgage payments being reported to the credit bureaus as late.
While you might think this should be expected, the fact that this new payment has been agreed on by both parties is surprising many of these borrowers, who have fought hard to keep their good credit ratings. CNN Money has a great article on this today.
The collateral damage of these late payments can easily result in higher credit card fees and frozen credit lines for customers. Coupled with hardships they are already facing, it can be enough to sink their chances of recovery, even though their mortgage payment is reduced.
Not to mention it will make traditional refinancing or additional new borrowing more costly if not impossible. These borrowers may find it difficult to obtain loans for auto purchases, and will surely see higher interest rates.If you or someone you know is considering a mortgage modification, please consider this negative aspect and prepare yourself for the hardship it can cause. If you have large outstanding balances on credit cards, then the reduction in your mortgage payment could easily be offset by increased rates on your credit cards. As with most government programs these days, for every benefit there seems to be an even more pronounced detriment. Inform yourself and make the best decisions for your situation.
Comments
There are several ways to mitigate credit damage.
I have discovered 3 steps to help people with their credit, if they're in the middle of a loan modification.
Step 1: Identify HOW your making payments and to which creditors your making payments to.
Step 2: HOW you choose to go late. This is a KEY factor since creditor communication is very critical here. Saying less is FAR better than saying more.
Step 3: Elegantly back out of your auto payment plan, if you have one. If not, register for AUTO PAY BEFORE YOU GO LATE.
For even more information, visit www.fixmyreport.com or call Corey at 858-270-0251
Part of the problem is that many of the consumers who sign up for a modification feel that they need to accept what the servicer offers without question. Since the banks have as much to gain as the homeowner, set some ground rules.
Although you can apply for a mod before you have missed any payments, the majority of those in the process have some type of derogatory marks on their credit report which is hurting them.
In any case, ask the lender to report the loan in modification to the credit bureaus, as this is a much better reporting code than showing late or even partial payments made. There is a special code for this!
Also, you cannot have your cake and have someone feed it to you. If you are requesting the lender to disregard the legal, written contract you have for something more favorable, you may take a hit on your credit score. Save your home, save your money, and then sweat the scores. They can be fixed.
Credit Should be reported as CURRENT - If yours is not being reported correctly file complaints under RESPA & FCRA.
Supplemental Directive 09-09 addresses Credit Reporting.
The servicer should continue to report a “full file” status to the major credit repositories for each loan under the HAFA program in accordance with the Fair Credit Reporting Act and the Consumer Data Industry Association’s (“CDIA’s”) Metro 2 Format credit bureau requirements. “Full file” reporting means that the servicer must describe the exact status of each mortgage it is servicing as of the last business day of each month. The Payment Rating code should be the code that properly identifies whether the account is current or past due within the activity period being reported – prior to completion of the HAFA transaction.
The full directive can be found at hmpadmin.com
Dan Harris
LoanModBook.com
How did Corey get a URL in his post?
Dan thanks for the info on the HAFA credit reporting, but the last sentence gives it away. The completion of the HAFA would be the permanent modification. The lates are being reported during the trial period, with the derogatory coding.
Corey- I must admit you lost me. Back out of auto pay or sign up for it, which is it?
Thanks for the comments.
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