And The Investor Wins: Understanding The Home Affordable Modification Program Net Present Value Calculation

Understand the NPV calculation and don't let the bank take your money and your home.

Have you ever wondered why so many borrowers have been turned down for loan modifications on their primary residence  even though they fit the basic criteria for a modification?  Well, it’s because of a little-known way of figuring if the modification is in the investor’s best interest known as the net present value calculator or NPV. Is this calculation in your best interest? Usually, it’s not.

The NPV calculator doesn’t just use the financial information you provided the bank when you applied for the loan modification. You see, the bank has investors — government and private — that provided the funds for your mortgage. These investors don’t want to lose money, as investing is their business, so why you may be eligible for a modification under the basic guidelines, the investor would  lose money by granting that modification. Often, the investor makes more money if the home forecloses. It all makes sense from the investor’s point of view. Of course, this is a simplified explanation, but you get the picture.

But what about your, the borrower’s, financial hardship in the country’s depressive economy? Does the investor really care about your hardship. Supposedly, they do. Therefore, you have to provide the all-important hardship letter in the loan modification package submittal.  But the investor really only cares about your problems  if  it doesn’t affect their bottom line.

The NPV calculator is actually a formula that takes your financial figures and a number of other factors into consideration. Factors such as current home value, resale time,  and foreclosure cost, compared with payments on the reduced rate, amount of principal that would be deferred with no interest so that you would qualify with under 31% of your gross income and other figures such as chance of default.

The numbers of those who are unable to qualify for a mortgage modification because of the net present value calculation are staggering. This is not quite as the Obama administration had planned. However, if you have been turned down for a loan modification because of the net present value calculation, you can request to see the values and have a chance to correct the figures, often to your advantage. If a sale date is upcoming, the bank must postpone the date to accommodate your request. Understand the NVP formula, be forceful and don’t let the investor win back your home.

Photo Credit: alexey05 on flickr.com.