Q: I know lenders have a lot of loan modifications going on and I have been reading your newsletter that states that many homeowners aren’t getting anywhere with their loan modifications.

Will going into a loan modification program affect my credit and my ability to get a loan in the future?

A: Unfortunately, the answer is yes and yes. But let’s review the situation.

You are correct, loan modifications have been a problem around the country. Recent reports show that the government’s actions to encourage lenders to grant loan modifications have fallen quite short of the goals initially set out by the White House.

While some borrowers have received temporary loan modifications, only a very few borrowers have received permanent loan modifications.

While some reports show that lenders claim that borrowers have not delivered all the documentation required to obtain their permanent loan modifications, not-for-profit enterprises that have been assisting homeowners in their requests for permanent loan modifications say that lenders have lost applications and documents and have not been processing the documentation in a way that leads to greater numbers of permanent loan modifications.

Also, the loan modification process still seems set up to tilt lenders toward denying borrowers permanent loan modifications. The process allows lenders to determine whether the lender will make more money with a permanent loan modification or by foreclosing on the home. And for some reason, the calculation seems to favor foreclosure.

Despite what you might think, the government’s loan modification process does not place the borrower’s interests first; it places the lender’s financial interests first.

And once the borrower has applied for a loan modification and receives a temporary loan modification, the lender then reports the borrower as either delinquent on the original loan or as not having paid the original loan as required.

Once the lender sends that information to the credit reporting bureaus, your credit history and credit score take a significant hit. That hit to your credit score might be so large, it precludes you from refinancing your loan at the best rates or even at all.

(By the way, the government promised repeatedly that if you were current with your mortgage before you entered a loan modification program, you would be reported as paying on time through the loan modification process. This is apparently false. None of the lenders are reporting customers who were current on their loan who then entered the temporary loan modification process as paying on time, thus destroying hundreds of thousands of perfectly good credit histories and scores. The only word for this is outrageous!)

If you can refinance your mortgage to take advantage of today’s low interest rates, you should definitely consider that route before calling your lender for a temporary loan modification.

The full ramification of loan modification programs is unknown and the fallout for millions of American homeowners could be five to ten years of poor credit scores that preclude them from borrowing at the best rates and points – even if their credit was nearly perfect before they went through the loan modification process.

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