These comments are from my credit reporting company that works daily with these opportunities.

Most loan modifications we've seen so far under the various Stimulus plans have been interest rate reduction as opposed to principal reduction so that is the experience on which the following comments are based.

What we are seeing with most interest rate loan modifications is that the borrower is instructed by the creditor not to make any payments until the modification process is complete.  This can take up to nine months.  Once the modification is complete, the delinquencies are removed.  The drawback is that even though the delinquencies are removed, the "remarks" on credit reports will read "payment plan in place".  This is similar to "consumer credit counseling".  We are seeing scores effected similar to the effect of a recent collection account, somewhere around 60 and 100 points, depending on the borrowers overall credit picture.  We have also reviewed files where the borrower was instructed to pay until the process was complete.  While exactly opposite in structure, the result is the same, damaged credit due to the remark line "payment plan in place".

I am unsure as to how the banks are going to report the credit when the modification is a principle reduction.  Currently, it is up to the creditor as to how they decide to report it.  Until we see some actual history, we really can't speculate how they will report except to say that it is very likely to be an adverse mark on an individual's credit. 

In any of these scenarios the borrower did not meet the obligations of the original contract and therefore their reported credit must reflect that reality so the next credit grantor is aware of the situation.
 

The best advice that can be given when working out the details of a loan modification with the bank, is to clarify how the loan will be reported by the credit agencies once the loan mod is complete.   Again, if coded negatively and attached to a mortgage, it will likely create problems through automated underwriting even if scores remain within guidelines.  It is essentially a mortgage that hasn't met the obligations of the original contract.