The Obama administration’s Making Home Affordable program requires that a modification be made when the net present value test is passed. Most servicers should be using net present value calculations to determine whether or not to offer a loan modification to homeowners in default.
What Is NPV?
NPV stands for Net Present Value. Leading investor representatives have stated that servicers should perform loan modifications when a proposed loan modification “passes” an NPV test.
If a loan mod passes the NPV test, the servicer is insulated from suits by investors under federal law.
Net present value calculations compare the value to investors of a loan modification as compared to a foreclosure. These are “net” calculations because the value of a foreclosure is subtracted from the value of the loan modification and “present value” because the value of the loan modification and the value of the foreclosure are both stated in present dollars. The present value calculation discounts the future cash stream of the loan modification or the future payoff from a foreclosure by a standard interest rate (sometimes called the “discount rate”), applied over the projected length of time of the foreclosure will take or the loan modification will last.
The modification is also discounted for the probability that it will not perform, or, in other words, that the borrower will “redefault.”
Embedded in any net present value calculation are assumptions about how much will be recovered after a foreclosure. These assumptions should include a reasonable estimate of foreclosure costs, the actual current value of the home, and some forecast as to what the value of the home will be when sold following foreclosure. The time to foreclose and the time to sell a home post-foreclosure are also critical elements.
Most net present value calculations also make assumptions about whether or not a loan modification will perform. The redefault rate assumptions critically affect the approval or denial a loan modification.
Remember that the NPV calculation only measures the expected benefit to investors of a loan modification versus a foreclosure. NPV calculations do not take account of claims a consumer may have, or the cost and time of litigation, or any of the larger societal costs of a preventable foreclosure. There will be many cases when a borrower may fail the NPV but should still be offered a loan modification.
What Are the Differences Between the Making Home Affordable Program NPV Calculation and the FDIC Spreadsheet?
Treasury has not publicly released its model spreadsheet and is allowing servicers to make their own, proprietary spreadsheets, thus a complete comparison is impossible. The servicer guidelines require servicers to combine the present value of the unmodified payment stream with the value realized after a foreclosure before netting the result with the value to be obtained from a modification. An additional theoretical difference is that servicers are expected to include the risk of prepayment in determining the value of a loan modification (but not, apparently, in setting the value of the payment stream pre-modification).
Taken from the NCLC website.
January 29th, 2010 at 11:12 am
is anything being done to repair peoples credit because of this housing crisis? any class action suits against lenders or credit report agencies to ease the damaging burden to our credit scores because of this mess alot of us are in?
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January 29th, 2010 at 12:07 pm
Do you have a sample (or template) of the latest NPV Spreadsheet which I can download?
I have a copy of the original one which was published on the MakingHomeAffordable.gov website, however since then there has been one or more revisions and to obtain a sample (or template) you have to have a user name and password (to the HAMP website) and the only way to get those is to be a registered servicer with HAMP.
Many lenders are rejecting modifications, some after having received all the trial payments and saying you don’t qualify. As an example I know a fellow church member in this position, however using the NPV Spreadsheet I have, he does qualify.
It seems to me that since the NPV was developed using public funds, there should be more transparence in the HAMP program by allowing individuals access to the NPV spreadsheet so that the lenders assertions (about a borrower not qualifying) can be verified.
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Todd Temaat Reply:
February 8th, 2010 at 10:46 am
Unfortunately, no, I don’t have one either. I haven’t been able to find it anywhere. If you/your friend goes to a HUD Housing Counselor, they might have one or be able to answer you questions about your situations. Although they’re quite busy and are often, unfortunately, staffed by unknowledgeable people. You might also check out some local foreclosure attorneys or consumer advocates if you have any in your area.
Thanks for writing and sorry I couldn’t be of more help.
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