Mortgage Modification Won't Affect Credit

We have all heard stories about how unsympathetic banks are to the plight of upside-down homeowners; and with more than 20 million out of 90 million borrowers owing more on their homes that those homes are worth, we’d expect that banks are going to become even tougher when homeowners request loan modifications.

However, we might be incorrect. Because, according to new Consumer Data Industry Association guidelines, lenders have a new designation that can be applied to a loan modification situation. The borrower’s new status will be “loan modified under a federal government plan.” While that is quite a mouthful, FICO, the well known credit score provider, says that this designation will have no affect on anyone’s credit – at least for the time being.

The typical deal works like this: if you’re behind on your mortgage, pay on time for the next 3 months. The bank may or may not allow a reduced payment during that period. However, whatever the mortgage modification arrangement that is made, if you stay current during that time, the bank may consider lowering the monthly payment for up to 5 years.

While the number of people in these programs has increased by close to 100,000 per month, these numbers still account for just over 15% of mortgage payments that are either late or delinquent. Yet, despite the large numbers of homeowners who are far behind in payments, only a small percentage of them are emerging as foreclosures.

Many experts think this is because banks just can’t handle all the paperwork that a massive number of foreclosures would precipitate. Others feel that quiet pressure from the Obama administration has slowed down foreclosure proceedings, so that there has been time to initiate these kinder, gentler anti-foreclosure measures.

The purpose of this new loan modification measure is, of course, to keep more people in their homes, and put fewer people into foreclosure. Economists may be at odds on whether loan modifications will alleviate the mortgage crisis; but virtually all agree that evicting millions of families from their homes would create economic chaos.

Before the housing crisis, homeowners who could not afford their payments were able to sell their properties. On rare occasion, they might even come out ahead. However, because so many homeowners are currently upside-down, the only selling possibility at the moment is a short sale.

But, with the new loan modification designation, if homeowners remain current, they can avoid having to short sale their homes. Now they stand a good chance of remaining in their homes for several years and not feeling overburdened by the monthly payments. In time, as the housing market recovers and inflation helps to raise prices, they may even be able to sell at a minor profit. In the meantime, or until banks change their collective minds, if homeowners keep their modified payments current, their credit ratings will remain relatively unaffected.

Written by Marc Jablon, Realty Associates
marcjablon@yahoo.com
561 / 213 – 6139
www.MarcJablonHomes.com