Do loan modifications affect your credit score? Should they? Why should you care?

Credit scores are a numerical value credit bureaus place on a borrower as a way of measuring their reliability. It is in the interest of lenders to report any delinquent activity to the credit bureau. In fact some would argue that it is in the interest of everyone as delinquent borrowers make loans more expensive for everyone by forcing lenders to increase interest rates to pay for bad loans. This is why potential borrowers that have bad or low credit scores find it harder to get loans approved or have to pay a premium for the privilege.

Borrowers that don’t make one or various payments are marked by a special code that informs other lenders of the situation. Borrowers that are granted a reduction of their loan balance or monthly payments due to financial difficulties are also marked with a special code called AC. This code can reduce the credit score of a borrower by anything between 30 and 100 points and tells lenders that the borrower had only made a partial payment.

The problem arose when troubled borrowers entered the loan modifications sponsored by the government and were granted loan modifications without ever having missed a payment but were still marked with AC as it was the closest fit in the “system”.

The Obama Administration felt it was unfair to harm the credit scores of borrowers that sought a loan modification. Therefore a new code “CN” was thought up which will not have an impact on credit scores for now.

The question is if this will change. Will the code CN affect the credit score of borrowers in the future? This is still to be determined. It will depend on if FICO, the company behind the most popular credit score formulas, decides the appearance of CN in a credit report increases the chances or is predictive of delinquent behavior.

It is worth noting that borrowers that enter into a loan modification are asking for a reduction of their loan and are therefore not wonderful news for lenders that are looking for reliable customers. It is not at all clear to me why it is wrong that their credit score is somewhat affected.

However what is certain, and this is what worries the Administration is that borrowers with a good credit history will shy away from a loan modification that threatens their credit.  Lenders might argue that borrowers who feel they have a choice and prefer not to enter into a loan modification that would damage their credit don’t really need it and can very well pay the full loan, thank you very much.

How you feel about the matter may very well depend on which side of the fence you are looking from. The Obama Administration wants to give HAMP the best chance possible and is eager to erase any bad publicity the program attracts even if this means fudging credit reporting codes. Whether these measures are long lasting or not will depend on the performance of borrowers that enter into a loan modification, it must be said at this stage that things don’t look all that good.

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Related posts:

1. Wachovia Loan Modifications Help Only 3% and May Damage Your Credit Rating
2. Are Credit Scores Obsolete?
3. Loan Modifications and Mortgage Modifications Can They Affect Your Credit Score

Related posts:

1. Wachovia Loan Modifications Help Only 3% and May Damage Your Credit Rating
2. Are Credit Scores Obsolete?
3. Loan Modifications and Mortgage Modifications Can They Affect Your Credit Score

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Filed under: Law, Apple Inc (AAPL), Research in Motion (RIMM), Eastman Kodak (EK), Options

Eastman Kodak (EK) is grabbing headlines after the film firm filed a complaint with the U.S. International Trade Commission (ITC), alleging that Apple’s (AAPL) iPhone and Research In Motion Limited’s (RIMM) BlackBerry camera phones infringe on Kodak’s patents. Kodak is asking the ITC to block Apple and RIMM from importing the offending devices.

Additionally, the iconic photography company filed two suits against Apple in the U.S. District Court for the Western District of New York. Kodak is claiming infringement of patents “related to digital cameras and certain computer processes.”

Continue reading Kodak Alleges Patent Infringement by Apple, Research in Motion

Kodak Alleges Patent Infringement by Apple, Research in Motion originally appeared on BloggingStocks on Thu, 14 Jan 2010 12:40:00 EST. Please see our terms for use of feeds.

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Filed under: Consumer experience, Google (GOOG)

Google (GOOG) is finding out the hard way that a sleek new piece of gadgetry comes with high consumer expectations. The Google Nexus One, which was just released over a week ago for direct sale by Google without a contract from partner T-Mobile USA, is losing the bloom (off the rose, that is).

Continue reading Why Google Has Lessons to Learn from Real-World Customers

Why Google Has Lessons to Learn from Real-World Customers originally appeared on BloggingStocks on Wed, 13 Jan 2010 16:40:00 EST. Please see our terms for use of feeds.

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The deterioration of the housing market in California is stunning.  If we look at the amount of distress in the state it would be hard to believe that the market is doing well yet some think the next boom is just around the next subdivided lot.  Loans that were made at the peak of the […]

The deterioration of the housing market in California is stunning.  If we look at the amount of distress in the state it would be hard to believe that the market is doing well yet some think the next boom is just around the next subdivided lot.  Loans that were made at the peak of the bubble are now coming back to haunt the state in 2010.  People forget that the bulk of the option ARM loans were made from 2004 to 2007.  The problem goes beyond option ARMs, Alt-A, and even subprime loans.  Many prime loans are now defaulting because homeowners are dealing with a weak economy.  Today we are going to look at a vintage WaMu loan that is now finally heading back to the bank after two years of distress in Pasadena.

Before we examine today’s Real Home of Genius, let us take the market pulse of Pasadena California:

Every zip code in Pasadena has a significant amount of shadow inventory.  For example, a zip code like 91103 supposedly only has 2.2 months of inventory if we only look at the MLS but add in the shadow data and that number balloons to over 19 months.  That is the difference between a hot market and a market in major distress.  Today’s home is in the 91103 zip code.

Today we salute you Pasadena with our Real Home of Genius Award.

This above home is one example of thousands of why the housing down turn will be prolonged.  The above home has an interesting history to it.  This home is a 4 bedrooms and 2 baths home listed at over 1,500 square feet.  The first sign of distress occurred back in March of 2008 when the notice of default was first filed.  So what this means, is the first missed payment must have occurred sometime in December of 2007 or January of 2008.  In other words, this home has been struggling for 24 to 25 months and who really knows how many payments were coming in (this home has essentially tracked the recession).  The mortgage note history shows us a disturbing trend:

Washington Mutual in their wonderful pricing model, decided to jump into this home back in 2005 to the tune of $325,000.  All was well until that notice of default was filed.  It is interesting because this note is part of the WaMu Mortgage Series 2005-PR4 mortgage pass-through certificate.  These were those toxic mortgage backed security pools Wall Street couldn’t get enough of.  Query this pool in Google and watch the lawsuits pop up all over the country.  So while Wall Street is paid out in full, here is this home now owned by the bank.  Yet where is it listed?  Surely after two years of distress it can be put on the MLS.  It is nowhere to be found.  And this was taken back on December 21 so that should be plenty of time to list it.  Welcome to the shadow inventory world.

Now some people think that just because you don’t see the problem, then they don’t exist.  They tend to believe in the windless theory of mortgage distress.  They can’t see the wind but feel it and still refuse to acknowledge the problem or theorize the problem away as if the government can enforce higher home prices.  They cannot.  Now that FHA insured loans back 4 out of 10 loans in California you actually have to back up your purchase with actual income.    If you look at the above chart, the million dollar zip code in Pasadena sold 6 homes in the latest data but has over 27 months worth of total inventory.  And who really knows how many homes are 90+ days late that aren’t even showing up in any data sets.

What people think is that somehow, once these homes hit the market that banks will recoup their losses.  Let us look at a foreclosure that is viewable by the public in the same zip code:

The above home is a 2 bedrooms and 1 bath home.  It is listed at 1,104 square feet and was originally built in 1903.  Let us look at some sales history:

11/26/2003:        $322,500

4/14/2006:          $590,000

And what is the current list price?  $406,500 or a drop of 31 percent.  This home has been listed for 139 days and counting and interest is very low.  So if waiting to list this home was a bank strategy it has not worked.  The amount of inventory is large and the value is high now that we are seeing banks dealing with more commercial real estate defaults as well on failed condo projects or mulit-unit complexes.

Today I’ll run a new feature and show the “estimated” value for shadow inventory for Pasadena:

Notice of defaults:                                          $134,452,727

Properties scheduled for auction:            $181,642,615

Bank owned:                                                     $41,618,834

In total Pasadena has over $356 million in distress inventory.  Keep in mind this estimated value is at the very high end so we are looking at 30, 40, or even 50 percent price cuts.  In other words, hundreds of millions of dollars of losses for this city are just waiting to happen.  Yet some believe this is the fuel that will ignite prices higher.

And let us go back to that foreclosure selling for $406,500.  You know why it sitting without any interest?

The above is why.  Incomes cannot support current prices even after collapsing from their peak:

Ultimately prices in many areas in California are still in bubbles.  Some would like to believe that with hocus pocus and holding properties off the market that somehow some housing wizard is going to come by and suddenly turn toxic mortgages into wonderfully current notes.  It is not happening and won’t happen.  Over the last month I have seen numerous articles even in the mainstream media encouraging people to walk away from their mortgage.  I see this happening for California and in many cases is the wise thing to do.  For people in option ARMs here in the state, the choice is rather simple.  Banks don’t want to admit this but from what I am seeing, you can virtually live payment free anywhere from 1 to 2 years.

Clearly delaying tactics are not helping the housing market.  Today we salute you Pasadena with our Real Homes of Genius Award.

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Real Homes of Genius: A Foreclosure Process Lasting over Two Years in Pasadena. What is the Estimated Value of Shadow Inventory in Pasadena?

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This is the question administration consultants and officials are asking themselves. After using every trick in the book and more to “encourage”, “bribe” and “bully” servicers in providing loan modifications, loan modification conversion rates are still terribly low.

Ineligible Applicants.

Some have reasoned that the reason loan modification conversion rates are so slow is that many borrowers are simply ineligible under the current loan modification program, also called Home Affordable Modification Program (HAMP). HAMP does condition acceptance into the program, homeowners must be able to afford the modified payments, the cost of housing must not exceed 31% of the households income and the NPV test (Net Present Value) must be passed among other requirements before a loan modification is granted permanently.

Wrong Crisis.

A parallel argument is that the HAMP program is simply targeting the wrong problem. The issue, in the opinion of those that voice this argument, not a mortgage crisis, but a credit or unemployment crisis.  It must be granted that with many homeowners their mortgage is the least of their worries or at least only one of many.

This argument seems to be validated by the fact that more and more troubled homeowners have prime loans with excellent interest rates and conditions but are struggling with their mortgages because they are unemployed. Modifying the mortgage payments will not help these homeowners which in most cases aren’t eligible for a modification anyway.

Greedy Servicers.

Some have pointed out that in many cases loan modifications simply don’t make sense for servicers because they cost more than they are worth, at least for servicers. Servicers, often banks, manage mortgages for lenders. They don’t supply the cash but deal with customer service, collect payments and pass them on to the lender or lenders of the mortgage.

Loan Modifications are too expensive.

A similar line of reasoning points to high cost of modifying a loan. Lowering the interest of a loan or reducing the principal can cost lenders tens of thousands of dollars with the added risk that borrowers can re-default despite the money invested in the loan modification. From a business standpoint if can seem logical for banks to say no thanks to government incentives which are often inadequate and cash in on a foreclosure.

If any of these explanations are true of if they all contribute to the program is hard to say. What does seem clear is that we are dealing with a complex crisis that will not be defeated with any one silver bullet. A combination of economic and social measures will be required to fight the housing, credit and unemployment crisis the U.S and world as a whole faces.

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1. Obamas Loan Modification Success Explained
2. Rogue Loan Modification Servicers, What Are The Signs?
3. TARP, Loan Modification And Other Disaster stories.

Related posts:

1. Obamas Loan Modification Success Explained
2. Rogue Loan Modification Servicers, What Are The Signs?
3. TARP, Loan Modification And Other Disaster stories.

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Filed under: Google (GOOG), China, Politics

There was quite an amazing development Tuesday afternoon, when Google Inc. (GOOG) said it is considering pulling out China. It explained on its Google Blog how in mid-December it detected cyber-attacks originating from China.

The attacks were part of a larger assault on other companies. At Google, the attackers accessed the Gmail accounts of Chinese human rights activists and the accounts of dozens of American and European-based supporters of human rights in China. Google also said it will stop censoring its search results in China.

Continue reading Is Google’s Threat to Pull Out of China a Good Move?

Is Google’s Threat to Pull Out of China a Good Move? originally appeared on BloggingStocks on Wed, 13 Jan 2010 11:30:00 EST. Please see our terms for use of feeds.

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