Net Present Value or “NPV” Test
Many of our loan modification clients come to us for help after their lender has denied their request for a loan modification. Often the mortgage servicer's reason for the denial is that the homeowner has failed the Net Present Value, or "NPV" test. But what is this "Net Present Value Test?"
Net Present Value is a concept used in making financial choices. Mortgage servicers use it as a way to determine which action is more profitable for them in the long run - modifying the loan or foreclosing. Generally, a loan modification will be deemed to be in the best interest of investors when the net present value of the income stream of the modified loan is greater than the amount that would be recovered through a foreclosure sale. In other words, if the lender can make more money from a loan modification than it can from foreclosing, then the homeowner should pass, and not fail, the Net Present Value test.
It is our legal opinion that in today's market, the net present value of a loan modification will almost always be greater than foreclosure because a foreclosure will only net the lender what the fair market value of the home is today - an amount which is tens if not hundreds of thousands of dollars less than what the borrower owes on the property. Therefore, even if the lender reduces the interest rate to 4%, the amount recovered from the loan modification will be greater than the amount recovered from a foreclosure because few if any loan modifications reduce the principal balance owed to the fair market value of the home. So why do so many homeowners allegedly fail the Net Present Value test?
The first thing you should know is that the Net Present Value formula contains secret ingredients, so it is hard for delinquent homeowners to decipher the results when being rejected by the servicers for loan modification. We believe that lenders are either negligently or purposefully denying thousands of homeowners a loan modification for allegedly failing the Net Present Value test because they believe that most borrowers will ultimately default on their loan modification. That is why we believe they will put many homeowners on a trial loan modification plan but fail to give them the permanent modification.
If you have been wrongfully denied a loan modification for failing the Net Present Value Test, below are a few pointers that you can use to ensure that you have not been wrongfully rejected for a HAMP loan modification. If these suggestions still do not result in a permanent HAMP modification, please call us today at 1-800-872-5925 to discuss your legal options as we have filed lawsuits against many lenders and obtained loan modifications for clients who have initially been rejected for failing the Net Present Value Test.
- July/August 2010, NCLC Reports Bankruptcy and Foreclosures Edition