Credit hit from loan mods?

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Modifying mortgages to make them more affordable for struggling borrowers is a cornerstone of the Obama administration's housing rescue plan. It allocates $75 billion for an initiative that would reward loan servicers for lowering mortgage payments for five years, after which they would rise to today's current market rates -- which, fortuitously, are in the low 5% range.

We all know that foreclosure is a serious black mark on your credit rating. So is missing some mortgage payments. But several readers have written in to ask about the credit implications of getting a loan modification.

Lisa Sitkin, a staff attorney with Housing & Economic Rights Advocates in Oakland, was kind enough to take a crack at answering that question. Here's what she wrote:

Our view is that a loan modification that included a principal reduction might be reported as a write-off of some sort. Loan modification without a principal reduction (which will be the case in most borrower's modifications) should not be reportable, but that is not a guarantee it won't be. Credit reporting is something borrowers should be asking servicers about as they discuss modification. They should also request that prior past-due reports be changed to reflect new current status after the loan modification.

Sitkin suggests checking with an attorney with debt collection and/or fair credit reporting expertise for more insight on this issue; there is an attorney directory on Naca.net. For a run-down on the administration's housing plan, check out www.financialstability.gov.

Posted By: Carolyn Said (Email) | March 06 2009 at 12:06 PM

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