Working in sales, Peterson earns as much as 50 percent of his salary from commission. In this economy, he’s watched his income drop. In March, Peterson’s wife lost her job. She’s since found work, but the couple still had great concerns about meeting financial obligations.
Back in February, the Petersons requested a modification from their lender, Chase Home Financial. They filled out forms and wrote a hardship letter. After many follow-up calls, faxes and e-mails, they were offered a modification that would significantly reduce their mortgage payment.
The couple were thrilled. Then they asked the $64,000 question: what would happen to their credit scores?
“Considering our predicament, we figured that a slight hit to our score was worth it in return for the lower payment,” Peterson said.
They had concerns because their daughter would finish high school in two years, and then, they were planning to downsize. They’d need to maintain their high credit scores — in the 700s — for favorable terms on a new mortgage.
No one at Chase could tell them, so they withdrew their application.
THE IMPACT OF THE MOD SQUAD
There is no clear answer to Peterson’s question.
There are guidelines by the Consumer Data Industry Association, a credit reporting trade group. These recommend lenders report modifications as “partial payments.” Not good for credit scores.
John Ulzheimer of Credit.com called the guidelines “horribly premature’’ because no studies have indicated people who modify are actually higher credit risks than those who don’t.
“They sentenced hundreds of thousands, maybe millions, of consumers to lower scores. And, scared others out of taking advantage of the loan mod programs,” Ulzheimer said.
To confuse consumers even more, not all lenders follow the guidelines.
That may change on November 1, when lenders can use a new code to report them as a “loan modification under government program.” The code will clarify which borrowers have taken modifications, but because the modification process itself is not streamlined, it won’t be the only worm squiggling out of the can.
The bigger impact on credit scores may depend on how the loan was modified.
A loan can be refinanced through the same lender with the same account number, said Jennifer Costello, a spokeswoman for the credit bureau Equifax. The updated account status, including the new loan amount and any term changes, would be reported to the file. (Probably a negative credit mark.) Or a lender may close the original account to refinance the loan, Costello said.
“Sometimes the decision is made to close the original account in order to refinance the loan,” she said.
Costello said in this case, the credit file would reflect two loans: the original account number showing the account has been closed, and a new account number for the new mortgage.
If the old account is closed and the lender doesn’t report it as a modification, it may appear on a credit report like a traditional refinance — not a bad mark at all.
It makes sense for credit scores to take a hit after a modification, said Tom Kelly, a spokesman for Chase, Peterson’s lender.
Because of privacy concerns, Kelly couldn’t specifically discuss the Petersons, but he offered this story: Say two borrowers purchase homes on South Main Street on the same day, for the same amount, with the same mortgages. The borrower at 2 S. Main St. pays his mortgage every month, but the borrower at 6 S. Main St. is having a financial hardship. He gets a modification lowering his monthly payment by $600 a month, or $7,200 a year, or $72,000 over 10 years.
“The family at 2 S. Main St., in fairness to them, they should have a better credit score than the family at 6 S. Main St.,” Kelly said.
But no one can say exactly how your score would be affected. It seems even the credit-scoring companies aren’t sure.
“Whether a loan modification affects the borrower’s FICO score depends on whether and how the lender chooses to report the event to the credit bureau, as well as on the person’s overall credit profile,’’ said Tom Quinn, vice president of global scoring for FICO.
Like every modification, every borrower is different. Some may have scores in the 700s, like Peterson, while others may have less-than-desirable credit from the get-go. Because scoring companies like FICO treat scoring formulas as a trade secret — think KFC’s special recipe — lenders can’t simply plug in a few numbers and tell a borrower what impact a modification would have on their score.
TO MODIFY OR NOT TO MODIFY?
Credit score concerns are valid because future scores will have an impact on your future borrowing abilities. A lower score will mean higher borrowing costs on loans of all kinds.
But given the choice between a hit to your credit score or losing your home — which will also hurt your score — it makes sense to keep your home at all costs.
Ask your lender how it plans to report the modification, said Steven Katz, spokesman for the credit bureau TransUnion.
But don’t be surprised if the lender can’t tell you, just like Chase couldn’t tell the Petersons. It’s not that they were keeping a secret. They simply don’t know the answer.
UPDATE ON THE CRISCIONE FAMILY
There’s more to report on our first frustrated modification family, the Crisciones. Bamboozled helped nudge CitiMortgage to refocus on the Somerset family’s request for a modification on their second mortgage, and they got a deal lowering their monthly payment from $1,268 to $518 a month..
The couple said they had similar problems with modification requests on their first mortgage, so Bamboozled contacted their lender, Wells Fargo. Wells Fargo said it lacked a document or two, and once those papers were in, within two weeks, the Crisciones had a deal: the mortgage balance will be reamortized into a 39-year fixed-rate loan at 4.25 percent, reducing payments from $2,728 to $1,979.
“We think this is great,” said John Criscione. “Between the two, Citi and Wells, we’ve reduced monthly payments by $1,498 per month or an average of 37.4 percent between the two loans.”
John Criscione doesn’t know what will happen to his credit score in the wake of two modifications.
“Realistically, it’s the price to pay for survival,” he said. “In time, credit scores are repaired. It’s always give and take; should I have abandoned property and assets or ended up homeless for a good credit score? I don’t think so.”