impact a consumer’s score. 2. The credit score will reward consumers who have maintained an active account in good standing for a long period of time. 3. A positive impact also occurs when the greater proportion of outstanding debt in a consumer file is a large, stable debt, such as a real estate loan. Finally, as the study’s results are reviewed, it’s important to remember that the final design of any mortgage restructuring, including whether or not the lender reports a partial charge-off (c/o), is a function of the negotiation between the lender and the consumer.
Since delinquent populations already have negative reporting in their credit profile, adding an additional delinquent event was not as serious as changing from a clean profile to a delinquent profile. For example, as reflected in the table, the short sale scenario reduced the credit score of the “all clean” population by 130 to 120 points but only 25 to 15 points for the population who have delinquency on all accounts (first mortgage delinquent, other accounts delinquent).
STUDY RESULTS - IN DETAIL
CONSUMER SCORE REHABILITATION
As seen in Table 1, the first two forbearance cases had no impact on scores since the consumer still had an open/active mortgage loan and was still paying on time (just with reduced monthly payment amount). In the third forbearance case, where no payment was made during the forbearance period, the account was considered “paused” and therefore excluded from open account calculations that would normally be used in generating a score, lowering the score by 30 to 40 points.
A final analysis was run to demonstrate a score rehabilitation process after implementation of one of the mortgage restructuring events (such as loan modification). The intent of this analysis was to provide a general guideline for the time required for a consumer to restore their score to a reasonable credit tier after having become
For loan modifications that involved principal forgiveness, the partial forgiveness of principal reduced the consumer’s overall utilization level, helping the score. This remained true as long as the existing loan remains intact and was not replaced with a new loan, preserving the “age” of the account. Whereas, the creation of a new account reduced the average age of accounts on file and have a negative impact on a consumer’s credit score. In the case of loan modifications that resulted in recapitalization, the scores were slightly higher due to a higher credit amount on open real estate accounts. If a new account was created, this positive effect was partially offset by the loss of the existing account age and similar observations were seen for recapitalization as with forgiveness of subordinated loans. Derogatory events (short sale, all forms of foreclosure, and bankruptcy), had a much more serious impact to credit scores. A consumer credit score was reduced by as much as 115 to 140 points for short sale and foreclosures. In the case of foreclosures, a driving factor was whether or not payments had been made even as foreclosure was initiated. Bankruptcy had the most severe impact by far. The study determined that a consumer can experience a drop of as much as 365 points when all accounts are included in a bankruptcy filing. The study showed derogatory events had less impact to credit scores for consumers
24
already experiencing delinquent accounts on their files than to credit scores for consumers with all clean accounts (Population One).
significantly delinquent. Three scenarios were evaluated: 1. A loan modification agreement (reduced monthly mortgage payment) that provides enough monthly cash remaining on-hand to enable the consumer to pay all debts on time and to continue paying all debts on time for an extended timeframe; 2. A loan modification agreement (reduced monthly mortgage payment) whereby the consumer is able to pay only the mortgage on a timely basis and continue paying the mortgage debt on time for an extended timeframe but where the consumer remains delinquent with other debts; and 3. The consumer files bankruptcy. The consumers’ credit scores were calculated at three-, six-, 12- and 24-month intervals after the event.