The expansion of loan modification efforts from government programs into non-government ones may make a marginally positive impact on housing and mortgage market recovery by improving credit scores.
Moody's analysts maintain these types of mods, along with loss mitigation programs that preclude foreclosures, can help preserve borrowers' scores and can aid housing market recovery in times when stricter credit requirement standards and lending criteria exist.
Consumers and lenders should proactively seek out mods before the consumer experiences a severe delinquency in their credit file as late payments have a far greater impact on a score than mods. Certain mods 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 score and will negatively affect the consumer 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 mods will receive "similar treatment" allowing borrowers who are current on their payments at the time of modification to preserve their scores.
In other words, Moody's said, the impact of any workout on one's 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 mod code will not impact borrowers' FICOs negatively when new guidelines are implemented this summer, "this may change in the future." The impact may push the score down "if associated with negative performance."
And that differs from the HAMP guidance which included a new reporting code that eliminated any negative impact of these modifications on borrowers who were current at the moment of modification. As a rule, negative credit events remain on one's score for about seven years.
