The Net Present Value (NPV) is one of the main components in obtaining an approved loan modification.
Whether a homeowner is looking at a traditional loan workout or fits the criteria for the Obama Making Home Affordable Loan Modification Program, the servicer / investor has to determine the best course of action that will benefit their bottom line financially.
While a properly written hardship letter, complete loan modification package, and an overall loan analysis do play a major role in a homeowner’s eligibility for new mortgage terms, the final decision may depend on simple math.
Basically, the servicer / lender is acting as a debt-collector when negotiating a future loan modification workout scenario, and their primary objective is to protect the investors who have backed the mortgage debt that is potentially facing a default scenario.
Technically speakinng, the Net Present Value is defined as the total present value (PV) of a time series of cash flows. It is a standard method for using the time value of money to appraise long-term projects.
To translate NPV in a more comprehensive manner as it applies to a homeowner, it simply boils down to a mathimatical calculation based on which scenario will cost the bank less money in the long-run. In essence, NPV compares the value of a dollar today to the value of that same dollar in the future.
Controversy surrounding the Net Present Value test mainly deals with the various sets of investors in a pool of mortgage servicing agreements, and which outcome seems to be the most beneficial to the group as a whole.
Different classes of investors would benefit differently from a decision to foreclose and receive cash sooner vs others that would be better off modifying the mortgage term so that they could collect cash over time.
One of the primary objectives of The Making Home Affordable Program was to create a standard set of guidelines that servicers / investors could follow to help modify mortgages and keep homeowners in their properties.
Since the common theme with all of these loan workout plans seems to be finding the best possible outcome for the investors, it helps explain why homeowners feel frustrated when common sense decisions to lower monthly payments or forbear principle aren’t easily reached.
However, as property values continue to decline in many areas around the Country, servicers, investors, and the government are working hard to reach solutions that will help stabilize the economy.
Since we can’t necessarily control the actual results of a Net Present Value test, a successful loan modification still depends on submitting the proper documents and package to a servicer for approval.
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