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Loan modifications hurt credit scores to surprise of homeowners

Many homeowners don’t realize that entering a trial mortgage modification can actually hurt their credit.

Many people who apply for the president’s plan are already delinquent in their mortgage payments, which wrecks their credit backgrounds.

And obtaining a trial modification should affect borrowers’ scores because it shows they cannot meet their original obligation, experts said.

Case Study: Jason Axelrod learned that the hard way.

Axelrod, a municipal employee who lives outside Chicago, entered a trial mortgage modification program this spring.

Mike Rockwood has modified five of his own loans, including his personal residence and investment property. He has created a top-notch workbook to walk you through the steps of fighting to get the best terms on your loan modification.

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He had not fallen behind in his mortgage, but he was finding it harder to make ends meet after his overtime was cut and his property taxes skyrocketed. Told it would not hurt his coveted 750 score, Axelrod secured a $565 reduction in his monthly payments.

Eight months later, Axelrod is still stuck in the trial modification, trying to satisfy his loan servicer’s endless requests for documents.

And to his horror, his credit score has plummeted to 644.

“It’s completely destroyed my credit,” said Axelrod. “If I had known it would affect my score, I would have never entered the (loan modification) program.”

Representatives at JPMorgan Chase (JPM, Fortune 500), which services Axelrod’s loan, are instructed to tell applicants that entering a modification could impact their credit histories, a bank spokeswoman said.

Despite his weakened credit score, there is at least some good news for Axelrod: After being contacted by, JPMorgan Chase said his permanent modification had been approved.

Credit reporting guidelines

Under the president’s plan, troubled borrowers can have their monthly mortgage payments reduced to 31% of their pre-tax income.

Homeowners are first put in a trial modification for several months to prove they can handle the new commitment and to give the bank time to collect the necessary income and hardship verification documents.

During this period, industry guidelines call for loan servicing companies to report borrowers to the credit bureaus according to their status before they entered the loan modification – either current or the number of days delinquent.

However, borrowers’ accounts are also designated with a code indicating they are in a partial payment plan.

The coding alone can impact credit scores, which measure a consumer’s financial health and range from 300 to 850 under the FICO system. The severity depends on how many payments the borrower missed before entering the program. Those who were current in their mortgages could see their scores fall up to 100 points, according to the Treasury Department.

What banks are reporting to the credit bureaus is unclear

Just what banks are reporting to the credit bureaus remains a matter of some debate. Some servicers have been inconsistent in following the guidelines, according to a Treasury official. Also, they don’t always report that their current borrowers have entered modification plans.

Some 24,000 trial modifications were given to those still current with their payments, as of early September. A total of 366,000 trial modifications were in effect at that time. The total number has since risen to just under 700,000, as of the end of November.

According to the Mortgage Bankers Association, an industry group, servicers are required to report all information about their clients, including whether they are in modification plans. For seriously delinquent borrowers, this may improve their status somewhat since they will start making payments again.

“If you are in the trial period, over that three month period, you are going to improve your situation in most cases,” said Vicki Vidal, the group’s associate vice president for government affairs.

Once borrowers receive a permanent modification, their payment status is listed as current. However, the delinquency remains on their credit reports for up to seven years.

On top of that, the longer homeowners are listed as delinquent, the greater the impact on their credit score. That’s one reason why servicers should be quicker to convert borrowers from trial modifications to permanent adjustments, said Jan Jones, a housing counselor in Alaska.

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