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Q: How does the NPV of my home affect my chances of getting a loan modification?

Answer: According to a financial modeling company, the NPV results will determine whether or not you will get approved for a loan modification.

According to a recent article published at, here are the details on the NPV Factor:

The test is filled with secrets and uncertainties, but the grading is simple: You either pass or fail. Pass, and you are offered a mortgage modification. Fail, and you don’t get a loan modification.

NPV, which stands for net present value, is a concept used in making financial choices. “It’s a way for financial people to express a decision in today’s dollars,” says Brent Lippman, CEO of Response Analytics, a financial modeling company. // Article continued below //

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Loan modification expert, Mike Rockwood, and author of the recommended loan modification workbook, explains how to use a handful of proven strategies to escalate your demand for attention and action on your loan modification request.

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Mortgage servicers use an NPV test to decide which action is more profitable (or less unprofitable) in the long run:

  • Modifying the loan and accepting lower monthly payments.
  • Not modifying the mortgage and possibly tipping the borrower into foreclosure.

For the homeowner, the decision seems like a no-brainer: Modify the mortgage so it’s affordable and the loan won’t go into foreclosure. But a lot of modified mortgages wind up in default again, despite the borrowers’ intentions. So the net present value formula includes an estimate for the likelihood that the mortgage will redefault — that is, that it will end up in foreclosure, anyway, even after a modification.

How you can force your loan servicer to get off the dime and approve your loan modification - especially if they have been jerking you around

  • In your loan modification application, include a Qualified Written Request that requests a copy of the note. This is the note that is referred to in the video segment. If they cannot produce it, which is highly likely, you've got leverage against them to negotiate aggressively, ie, get a principal reduction along with better interest rate terms. This will likely an in-house modification deal, not a HAMP deal.
  • NEW: Robo-signing scandal may give legal leverage for approval Read More Here
  • Watch the Q&A Coaching Videos for more help:
# HowTo Package Your Loan Mod Application Kit
# HowTo Phone Negotiation Tips
# HowTo Complain & Motivate When Getting the Run Around
# HowTo Follow Up by Phone, Fax, Mail
# HowTo Use a Qualified Written Request
# HowTo Fight Rejection Tactics
# HowTo Stop a Foreclosure Sale In 1-Day

Besides the redefault rate, the NPV calculation makes guesses about several things:

  • How many months are likely to pass, on average, before a redefault.
  • How likely the borrower is to catch up on the payments if the loan isn’t modified (the “self-cure rate”).
  • How much the home is worth now.
  • How much the home will be worth a year from now.
  • How much it would cost — from legal fees to utilities — to foreclose and take possession of the house.
  • How much the house would fetch in a foreclosure sale, using a formula that the government calls the REO discount.

For two of those items — the home’s projected value in a year and the REO discount — the loan servicers must use formulas crafted by the federal agency that oversees Fannie Mae and Freddie Mac. The servicer assigns its own values and probabilities to the other items. (REO stands for real estate owned, which is how a property is identified after it goes back to a mortgage company.)

The NPV test is a “black box”

These numbers are secret. They’re unavailable to borrowers. If you want to know your home’s estimated value a year from now, or the odds that you’ll redefault, no one will tell you.

The NPV test is a “black box” in which data goes in, a decision comes out, and borrowers aren’t privy to details about how the decision was made. The Federal Housing Finance Agency maintains secrecy over its formulas, updated at the beginning of each quarter, for calculating projected home values and REO discounts. Mortgage servicers don’t disclose the probabilities that they assign for redefault and self-cure rates and the rest.

Go public with calculations

Consumer advocates have lobbied, in vain, for this information to be made public.

“Without access to the NPV analysis, homeowners are entirely reliant on the servicer’s good faith,” Julia Gordon, senior policy counsel for the Center for Responsible Lending, told the House Financial Services Committee Dec. 8. Gordon added that “servicers should be required to allow borrowers to review the property valuation used in the NPV calculation, as it is one of the inputs with the greatest effect on the results.”

But servicers and government agencies have rebuffed such requests. They say the NPV calculation is beyond the comprehension of many borrowers.

“There’s always some desire for a level of transparency with the consumer,” says Joanne Gaskin, director of mortgage scoring solutions for FICO.

“I think it’s important to educate them as far as the key variables that impact the decision, but actually giving the net present value engine to the consumer is probably not the best approach. It is a fairly complex process and decision for most average homeowners to understand.”

Maybe more important, secrecy allows servicers to avoid appeals and objections from borrowers who disagree with the home values and default probabilities embedded in the NPV test.

The federal government has come up with two NPV models

The federal government has come up with two NPV models that, in their simplest format, can be deployed as spreadsheets.

(The Treasury and FHFA developed the NPV model used in the Home Affordable Modification Program, or HAMP, and the FDIC built an NPV model dubbed “Mod in a Box.”) Some servicers customize these basic NPV models, transforming them into databases that pull information from many sources. Response Analytics and FICO belong to this modification customization industry.

Gaskin, of FICO, says almost half of servicers use spreadsheets to make modification decisions. Someone manually inputs information into the spreadsheet, which yields a decision. It’s a static, relatively primitive method.

Psychographic factors used

The biggest servicers, Gaskin says, have more sophisticated NPV decision engines with “all sorts of data input at the ready,” including FICO score, total debt obligations, household income and the probability that the borrower will walk away from the loan. The walk-away probability is based on factors such as location and how much more the borrower owes than the house is currently worth. The data can be refined and updated frequently, based on results of the servicer’s past mortgage modification decisions.

FICO and Response Analytics develop borrower profiles. “What you do is define groups of different types of borrowers,” says Lippman, of Response Analytics, “so you can infer behavior from others like them.”

This analysis includes “psychographic factors,” including the depth of the desire to stay in the home. For example, Lippman says, if you tell the servicer that you have deep roots in your hometown, with lots of family and friends, and you don’t want to be embarrassed by foreclosure, you will be deemed less likely to redefault.

Influence of your Hardship Letter

This likely marks the best opportunity to influence the mortgage servicer’s decision. Loan modification applications include a hardship letter, in which you explain why you need a lower monthly house payment. If you want to keep the house, it’s important to make this clear in the hardship letter.

Explain why you want to keep the house: for example, to avoid the embarrassment of foreclosure, or because you grew up in the house and it has sentimental value.

Before completing and sending in a loan modification package, you may want to obtain some coaching to combat the stall tactics banks/servicers are using to cut to the front of the line of other applications and get approved faster

Click here to get proven help with your home loan modification

Homeowners – Need Some Sound Advice?

Get Out of Debt Workbook
Seasoned debt expert shares several little known but highly effective techniques guaranteed to get you out of debt fast – no matter how much you currently owe.
Stop Foreclosure
Get more help on fighting to stop a foreclosure with one of 7 options. For example, if a loan modification is not an option learn about a little-known government program that will stop a foreclosure in less than a day without an expensive attorney.

Also get the latest foreclosure news around the country, read Q&As and other resources.

Legally Restore Your Credit
If you are visiting this blog, you likely have mortgage lates, which are a big blemish on your credit report. Once you resolve your mortgage situation, you can legally remove those mortgage lates and all derogatory credit from your report without having to hire an expensive attorney or credit repair service.

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One Response to Q: How does the NPV of my home affect my chances of getting a loan modification?

  1. Loan Modification on 22/01/2010 at 04:40

    This was a clear and concise explanation of a topic that is pretty hot right now. Thanks for a great article which shines a light on an interesting subject. I’ll be staying tuned for more articles just like this one in the future. Check out our site also Loan Modification.

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