Preventive Approach Benefits Modifications, Credit Scores

The expansion of the positive effect of government sponsored loan modifications into the non-governmentally sponsored modifications may also expand their impact --however marginal-- on the housing market recovery.

Insiders expect new expansions to the guidelines on modifications that are not sponsored by the Home Affordable Modification Program or other government options will help additional borrowers and the overall mortgage market.

Moody's analysts maintain these types of loan modifications, along with loss mitigation programs that preclude foreclosures can help preserve borrowers' credit scores and positively impact the housing market recovery in times when stricter credit requirement standards and lending criteria.

It is common knowledge that credit scores have become critical to prospective homebuyers who may or may not turn into homeowners that feed mortgage servicer pipelines if they have the right FICO score.

Regardless of whether borrowers are first time buyers or homeowners, their credit risk can fluctuate.

A VantageScore study suggests that when it comes to credit scores the focus need be on a few specific areas that assist borrowers and serve servicers as well.

Consumers and lenders should proactively seek out loan modifications before the consumer experiences a severe delinquency in their credit file. For example, late payments have a far greater impact on a credit score than loan modifications.

Certain loan modifications can positively impact the score based on the recapitalization structure of the loan and if the loan retains its original open date.

But a bankruptcy filing has the greatest impact on a consumer score and will negatively affect the consumer score for a minimum of seven years due to the presence of a public record on the consumer file.

Thanks to Consumer Data Industry Association guidance that takes effect this summer non-HAMP modifications will receive "similar treatment" allowing borrowers who are current on their mortgage payments at the time of modification to preserve their credit scores.

In other words, Moody's said, the impact of any workout on one's FICO score "depends largely on the reporting by the servicer to the credit bureaus" in addition to the borrower credit profile when entering the plan "and borrower's actions after the workout is completed."

But there is a catch, while the new modification code will not impact borrowers FICO negatively when new guidelines are implemented this summer, "this may change in the future." The impact can turn negative "if associated with negative performance."

And that differs from the HAMP guidance which included a new reporting code that eliminated any negative effect impact of HAMP modifications on borrowers who were current at the moment of modification.

As a rule, negative credit events remain on one's credit score for about 7 years.

Consumers can rehabilitate their credit scores relatively quickly, according to VantageScore -which suggests consumers and lenders work toward mortgage restructuring to ensure sufficient cash is available to the consumer and all other delinquent debts are brought to current status.

Analysis has shown that even consumers whose credit score has fallen to 625 due to multiple delinquencies prior to a modification can raise their score to over 700 in as little as nine months if they bring all debts current and maintain a current status for the nine months.

However, loan modifications will have a marginally positive effect on the broader economy both in the short and the long term.