Those homeowners looking for a mortgage modification may have a new hurdle to clear. It’s called the NPV test, and it’s largely a mystery to all but the lenders using it. While the inner workings of the test are hidden from the outside world and may be complex, the result is simple: pass or fail.
If you pass, you are still on the road to modification, but if you fail you are done.
NPV stands for Net Present Value. It’s a method for determining which action is more likely to make a profit, or lose less money.
In the case of mortgage modifications, the lender uses the NPV to determine whether modifying the loan and accepting lower monthly payments is more cost effective than possibly foreclosing on the property.
It may not be as simple as it sounds because many homeowners who have had their mortgage modified simply delay the inevitable and end up in foreclosure anyway. So, it seems likely that the NPV formula takes the risk of re-default into account.
What you can do about it.
Unfortunately, not much. Since the formula is a closely guarded secret (on par with that of FICO) it’s impossible to know exactly what information is used and how it is weighted. This makes it very difficult to affect the outcome. Still, there are some actions that Bankrate.com recommends taking if you find yourself in this situation:
- Declare loudly and repeatedly that you are determined to remain in your home (assuming, of course, that you are). Be sure to explain why you don’t want to lose your home, and how you’ll do just about anything to keep it.
- The government’s home value projection figures are updated at the beginning of every quarter. If the trend is headed in your favor and you’re close to the end of the quarter, you may try to delay until the next quarter begins.
In addition to the redefault rate, there is speculation that the NPV makes guesses about the following:
- How long until the average redefault
- How likely you are to catch up on your current mortgage if it is not modified.
- How much your home is currently worth
- How much your home will likely be worth 12 months from now.
- How much a foreclosure would cost the lender
- How much your house might sell for at foreclosure
As you can see, much of those questions are difficult if impossible to know for any single case, so the NPV formula must be some sort of actuary table much like the kind used for insurance; taking the likelihood of each in the aggregate of mortgages to make a “best guess” at each answer.
The bottom line is that your life would be much better if you can avoid this situation.
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