A scary development is taking place in the housing market, even though all of the talking heads in the media keep saying the recession is over. Well, here is some data straight from the folks who watch our  monthly “habits” not “intent”. All the more reason for my readers to learn the value of credit repair!

A growing number of struggling consumers are doing what was once considered unthinkable: paying their credit card bills instead of their mortgages. A recent study developed by TransUnion found the percentage of Americans who were current on their credit cards but behind on their mortgage increased to 6.6 percent in the third quarter of 2009, up from 4.3 percent in the first quarter of 2008. Meanwhile, the share of consumers making mortgage payments on time but behind on their credit cards moved in the opposite direction, sliding from 4.1 percent to 3.6 percent over the same time period.

The data reflects a “fundamental paradigm shift” in the way consumers prioritize payment of debt obligations, says Ezra Becker, of TransUnion. “This is dramatically different,” he says. “It is a clear manifestation of the dynamics that lead up to the recession and the recession itself.”

Before the housing crisis, bankers typically operated under the assumption that homeowners would do whatever possible to remain current on their mortgage–even if that meant falling behind on other bills. But a combination of factors linked to the current economic mess–falling home prices, high unemployment, and tight consumer credit–have lead many consumers to prioritize credit card payments above mortgage bills.

The development is rooted in the housing bust. When home prices turned south–falling roughly 30 percent from their peak in the second quarter of 2006–a great deal of borrowers watched the value of their homes drop below what they owed on their mortgages. Today, roughly one in four homeowners finds himself in this position, which is also known as being “underwater.” Without equity in their homes, such borrowers are more likely to default. “They don’t see any value in putting money into an asset that has lost that much value and will probably never regain that value to offset the mortgages,” says Celia Chen, of Moody’s Economy.com.

I was speaking at a real estate investor conference this past week and one question that kept coming in addition to How Do I Improve Credit Score or Repair A Credit Report…was “Mark, why do we keep hearing from investors and homeowners that so many Loan Modifications (loan mods) are simply not working?”

Well there is an easy answer and a not so easy answer to that question.

Floyd Norris over at the New York Times covered it best in this article. Check it out and let me know your thoughts.

Mark

The current mortgage crisis has left many individuals ‘upside down’ on their homes – owing more than the home is worth. Learn how to protect your credit scores and repair your credit report if this happens to you

A common strategy in these situations is to have the mortgage adjusted, generally with more favorable payment terms for the borrower. These loan modifications, some of them sponsored by the federal government, can be beneficial for individuals who need to gain control of their debt and reduce mortgage payments at the same time.

However, some borrowers are discovering that these mortgage readjustments and loan modifications are having a detrimental effect to their credit scores. This is because loan modifications are reported as partial payments, and may even be reported as late payments by lenders. Under the Credit Data Industry Association rules, loan modifications are typically reported as a partial payment, which can lower your credit score 50 to 100 points, or more, depending upon your particular situation.

Unfortunately, lenders are not required to tell you that they will report your loan modifications as a partial payment or a late payment. You may not find out about the damage to your credit scores until you attempt to apply for new credit or see lower limits on the credit that you are to have. Even if you make all agreed-upon payments under the new loan modification consistently on time, you may find that your credit report shows you as delinquent with regards to your mortgage payments. The only way to correct this is to contact the lender directly — the credit bureaus have no control over how your loan modifications are reported to them.

So what can you do to protect your good credit score if you need to have your mortgage modified? Your best option is to speak directly with the lender and find out how your loan modifications will be reported. By working directly with your lender upfront, you may be able to avoid the damage to your credit scores. If you are already taking advantage of a loan modification, it’s in your best interests to check your credit report and be sure that your timely payments are being ported accurately by your lender. If your bank has a policy of reporting loan modifications in a manner that is detrimental to your credit scores, you may wish to try to negotiate more equitable terms for your particular situation. Some banks are willing to work on a case-by-case basis with borrowers, so you may be able to get your credit report adjusted if you speak directly with the lender.

A final option is to place a notation on your credit report, detailing your situation. While this may not make a big difference in your actual credit scores, lenders who pull your credit report will have a more accurate picture of your current financial situation, as well as an understanding of your commitment to pay your creditors on time. By being aware of the potential damage to your credit scores before you enter a loan modification agreement, you can take steps to minimize the negative effects.

To learn more about how to repair credit report, visit CrushingTheCreditBureaus.com for more free tips, tactics, and techniques on how to protect your credit rating

Mark