Mods: Least Negative Effect on Credit Scores

San Diego-A study conducted by VantageScore found that loan modifications had the least negative (and possibly even a positive) effect on consumer credit scores.

Barrett Burns, president and CEO of the Stamford, Conn.-based company, said in an interview conducted at the Mortgage Bankers Association's annual convention here it had been asked by a number of regulators to quantify the effect loan mods had on credit scores.

Besides modifications, the study looked at forbearances, short sales, foreclosures and bankruptcies. When the borrower has a first mortgage current but is late on other trade lines, if the loan is modified without a new loan being written, the score improves by up to 30 points. If a new loan is written, it can fall as much as 15 points or increase as much as five. In a short sale, the score can fall as much as 110 points. The reason for the difference, he explained, is because by creating a new loan, the old payment history is erased.

To put things in perspective, a negative change of 40 points in the score doubles the risk, while a positive change of 40 points cuts it in half. In the other two situations, the modification result is still better than the others, but it does not have as much of an effect. This is because the credit score already takes into account the negative situation involving the borrower, he said. The study shows the benefits of modifications through the math, Mr. Burns said. This includes the point that a bankruptcy is a big hit on a credit score and stays on the file for seven years.

He said a modification could fix a consumer's credit score within six months as long they remain current. The credit score of borrowers current on the mortgage but delinquent on other trade lines can be reduced by 320 points to 330 points; where the borrower is delinquent on everything, the score is hit between 110 and 120 points.

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