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If you want a loan modification, you must pass the NPV test first.

by Dorota Trzeciecka on June 19th, 2010

Net Present Value (NPV) test is the last and the most important step in the loan modification process.  Pass the test, and you get to keep your home; fail the test, and the scale may tip in favor of foreclosure.   

Mortgage servicers must use the NPV test to determine whether a loan modification under the Home Affordable Modification Program provides the investor with a better financial result than if the modification had not occurred.  If the NPV test is positive (pass), the lender is required to offer the modification.   It is not optional.  If the NPV test does not favor the modification (fail), the lender may in its discretion, offer the modification to the borrower, but is not required to do it. 

Because the NPV test is, for the most part, shrouded in secrecy, it is difficult for  homeowners to influence its outcome, or to challenge it.  We know some of the variables that go into the base NPV test developed by the Department of Treasury, like your financial information, including credit scores, current gross income, debt ratio, and the current value of the property.  But, large servicers that have at least a $40 billion servicing book have an option to use their own variables, for example, an estimated re-default rate (that is, the likelihood that your loan will go into default after modification), based on their own experience, rather than using the rates in the the Department of Treasury base NPV model.  

This assumption of how likely you are to re-default, maybe your best chance to influence the outcome of the NPV test.   Therefore, it is crucial that you make it clear to the mortgage servicer that you want to stay in your home, and to explain why.   You have an opportunity to convey this message in a hardship letter, which you will be required to submit with your request for modification.  I do not recommend that you draft the hardship letter in a haphazard way, while sitting across from the servicer at the negotiating table!  What I recommend is that you make time and prepare a well thought out hardship letter ahead of time, carefully giving reasons for why you defaulted on the loan in the first place, explaining why you are not likely to re-default again, and emphatically stating that you want to remain in your house and in the community, and the reason(s) why.  For example, one of the valid reasons maybe that you want to remain in the house because you want to provide stable environment for your children.  Statistically, the borrowers who have long and strong ties to the community, and a strong desire to remain in their homes, have been shown less likely to re-default on their mortgage loans than those who are new to the community.    If you are one of these borrowers with long strong ties to the community, you need to say so in your hardship letter.     

Properly drafted hardship letter, conveying your strong desire, and the right reasons, to remain in the home, will tell the servicer that you are less likely to re-default on your mortgage.  It may also mean one less strike against you that may tip you away from foreclosure and towards modification.

From → Foreclosure

  • Steve

    I hired a company named NPVRESULTS.COM and they performed my NPV test and I passed, I took that test result and submitted to my Lender Indymac, about 45 days later I recieved a loan modification. I submitted my own Loan Modification with there report, and i was approved. This blog is right, if you pass thye NPV Test, you will get a loan modification.

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