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Loan Modification

: Blown Mortgage

NPV Test, Your Personal Loan Modification Sword of Damocles

By Andrew

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Understanding the factors that control the success or failure of your loan modification is vital if you want any chance of receiving a positive modification to your mortgage. Loan Modifications are not happening very fast and the modification rates for troubled homeowners are very low.

The reasons for this are many because loan modifications are complex and depend on a number of variables. Borrowers may fail to fill in paperwork, applications get lost in the process, banks and servicers drag their corporate feet and sometimes loan modifications are just bad business for lenders and must be dropped.

Determining if a loan modification makes financial sense to a lender is the purpose of the NPV (Net Present Value) test. It pays to understand how this test works because anybody that fails it has their loan modification automatically cancelled.

Why have an NPV test?

The purpose for the NPV test is to guarantee a loan modification is profitable in the long term for banks and servicers. The test is made up by an algorithm that takes into account various factors that will determine the behavior and attitude of the borrower, the price of the house and the ability of the borrower to pay the modified loan payments.

The exact form of the algorithm is kept secret to stop borrowers from trying to rig the test. The test measures the likelihood of a borrower from re-defaulting on their mortgage. This is determined by the income of the borrower and the reasons the borrower has to stay in the house. For example if a single borrower is stuck with an underwater house and has no ties with his current neighborhood he or she is going to get a much lower rating than a family with two children that moved to be closer to their aging parents.

An important part of the NPV test calculates the current value of the house. This takes into account the cost of foreclosure and the expenses related to selling the property. Once the ?deducted? or real value of the house is determined it is compared with the return the bank would get from a modified loan. If the lender does not benefit from the loan modification it is automatically revoked.

How to help your chances to pass your mortgage´s NPV test?

The NPV test mainly deals with facts and figures that are hard to influence, unless you lie, but there is still much you can do to improve your chances of passing.

It is important to create a solid case that proves you are highly motivated to stay in your house. One of the biggest costs of loan modifications is that after all the work, time and money invested borrowers often re-default bringing on the borrower all the costs of foreclosure he was hoping to avoid with the foreclosure.

This can be done by giving good reasons why you will stay in your house whatever happens, even if it is underwater and does not seem like a great investment at the moment.

The valuation of your mortgage is a very important part of your NPV test. You cannot do much to control the valuation but federal valuation projections change every quarter so if you failed your NPV test one quarter it is worth doing it again the next if you still have time.

A final step you can take is to provide evidence of why you can´t afford the current mortgage payments. Loan modifications are expensive as they include reducing interest, often for the lifetime of the loan, so banks need to make sure they are not providing loan modifications to borrowers that could afford their current loan payments with a little bit of effort and good old fashioned frugality.

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