What is NPV, you ask? What does it have to do with why I can't get my Permanent Loan Modification? And who the heck is Schrodinger's Cat anyway????
In my last post on the subject, The Elephant In The Room, we talked about how Servicer Compensation based upon a percentage of the Outstanding Loan Pool Balance might be skewing the way your Loan Modification Request gets handled.
Next up in our Little Shop of Horrors is NPV or Net Present Value.
Net Present Value is a formula that makes Schrodinger's Equation look simple. And like the famous Quantum Physics Thought Experiment, there is no way of telling in advance whether the cat is alive or dead.
The sole purpose of the NPV Test is to compare modification to foreclosure and determine which scenario is in the best interest of the investor. Yes...the investor, not the homeowner. Treasury Guidelines clearly state that the servicer is allowed to use the NPV test and is under no obligation to modify if foreclosure would be more profitable for the investor.
Unfortunately for the homeowner, the NPV Test is a complex formula that makes guesses about many things, such as:
· How much is the home worth now
· How much will it be worth a year from now
· How likely is the borrower to catch up on payments on their own (without modification)
· How much would it cost to foreclose
· How much could the home be sold for as a foreclosure
· And, my personal favorite, if the loan is modified how many months are likely to go by before a redefault.
This last one, in particular, tics me off. Much has been made of the high "Redefault Rates" among homeowners given early Modifications. Many of the homeowners I've encountered were approved for something called a Modification and, I guess, what they were given did "modify" their loan but the changes that were made did not help the homeowner.
I witnessed many instances in those early loan mods where the payments went UP because the servicer merely took the past due amount, divided it up and added it to future payments. In other instances the borrower's payment was reduced for a short period of time but after that period of time, once again, their payment went up. Both of these techniques are straight out of the Collections Handbook, have little to do with the true spirit of a Modification and are unlikely to be successful in the long term.
And then, of course, we have the HAMP debacle where the borrower is given a greatly reduced temporary modification payment, is ultimately rejected for a permanent HAMP modification (based, perhaps, on NPV?) and so is offered a "proprietary" modification which does not help the borrower in the long run and is unlikely to be successful but (like the HAMP temporary payments) grows the Servicer's loan pool balance and therefore their income.
There has been a, largely, quiet storm brewing over the lack of transparency concerning the NPV formula. Last December, Julia Gordon, senior policy counsel for The Center for Responsible Lending, told the House Financial Services Committee, "Without access to the NPV analysis, homeowners are entirely reliant on the servicer's good faith". She also added, "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 apparently, servicers, the federal government and Joanne Gaskin, Director of Mortgage Scoring Solutions at FICO (an organization that has much more power than they should - IMHO) all think we're too dimwitted to comprehend the complexity of the formula. Ms. Gaskin said, "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." The Treasury Department apparently agrees because although they have released an overview of the model, they have steadfastly refused to release the exact formula.
I would contend that keeping the default probabilities and home evaluation models embedded in the program hidden prevents any kind of meaningful objection from the consumer as to its findings.
I would further contend that hiding behind an NPV rejection allows the servicer to reject a true modification and perhaps offer a pseudo modification similar to those I mentioned earlier which benefits no one but them.
Holden Lewis of Bankrate has characterized the NPV test as being filled with secrets and uncertainties.
Hmmm? Uncertainties...perhaps if we boned up on our Quantum Physics we'd all come to understand Schrodinger's Equation, the Heisenberg Uncertainty Principle and why so many people can't get their Permanent Loan Mod.
P.S. No cats were harmed in the writing of this blog.