One of the hurdles you may need to cross on your way to a loan modification is something called a Net Present Value (NPV) test.
Lenders often run an NPV test when deciding whether to modify a mortgage loan. Modifications reviewed for eligibility in HAMP Tier 1 and HAMP Tier 2 require that the lender run an NPV test, but lenders often run one to determine eligibility for in-house modifications as well. Programs like HAMP require that you pass the NPV test.
The purpose of the NPV test is to help the lender decide whether it will be more profitable for them to modify your mortgage payments or whether will be more profitable for them to take the home to foreclosure.
The lender estimates how much money they will receive from selling the home at foreclosure and then compares that to the cash flow they will receive from modifying the mortgage. They also calculate whether you’ll be able to continue making payments if they agree to modify the mortgage.
If they determine they will receive more money from the sale of the property, you may “fail” the NPV test. If they determine that they will receive more money over time from modifying your mortgage loan, you may “pass’ the NPV test. This test does not produce a score, only a pass/fail response.
Main factors the lender uses to calculate your NPVIncome information from the borrower
- DTI: The lender will look at your income and expenses to determine your Debt to Income (DTI) ratio. A high DTI means you have reported so many expenses that you don’t have much room for even modified mortgage payments.
- Your credit score.
- Costs to take property back, if it’s not purchased by anyone else at that foreclosure sale.
- The current value of the property.
- Expected repairs and damages that need to be fixed in order to sell the property.
- Original loan amount.
- Original interest rate.
- Current interest rate.
- Unpaid principal balance.
- Remaining term on the loan.
- Months past due.
- Arrears and late fees.
The lender uses all this information and applies a formula to determine whether you have passed or failed the NPV test.Common problems
Lenders often make mistakes in their calculations. An accurate NPV result relies on the lender using accurate inputs. So denials occur because the lender used inaccurate information.Drive-by
Broker’s Price Opinion (BPO). Determining value is a huge part of the NPV process. Value indicates how much money the lender will receive at foreclosure. The only way to truly understand the value of a property is to perform either a full appraisal or an interior BPO. Oftentimes, lenders will complete an “exterior” or “drive-by” BPO that doesn’t truly account for the full value of the home. Exterior BPOs omit damages, needed repairs, and interior issues. The result of having an exterior BPO is that values often come back inflated. The lender thinks they can receive much more at foreclosure than is actually possible because their value hasn’t accounted for the interior of the home or any needed repairs. This could cause you to fail the NPV test as the lender will think that taking the home to foreclosure is their most profitable option.Income issues
Many people don’t receive income as a standard bi-monthly payment. There are bonuses, commissions, overtimes, self-employed income, and more, that cause income to vary. Lenders are often lazy—instead of requesting the average amount of income received or enlarging their snapshot of time to get a more accurate income sample, they will input an amount from one pay stub or from one month’s worth of self-employed income. The same goes for expenses. If your lender enters your monthly expenses incorrectly, it can interfere with your ability to show sufficient income to support modified monthly mortgage payments.Lender uses a high re-default rate
One of the inputs used in the calculation is a “re-default” rate. Lenders often have this field automatically filled with a re-default rate of 40%. This is high and often not representative of an actual re-default rate.
Tips for making sure your NPV analysis was properAsk for all inputs used
Don’t let the lender issue a NPV decision without showing you their inputs. Make the lender give you everything they used to complete the NPV test. If the lender can’t, or won’t, provide you their NPV inputs, they likely didn’t run the test. If this is the case, your denial is improper and needs to be appealed.Understand what kind of valuation was done on the property
See “Drive-by BPO,” above. If no one came to the property to do an interior BPO, the value of your home may be inaccurate.Run the test yourself before you submit your modification package
The formula for the NPV test itself isn’t clear but there is a useful tool here: https://checkmynpv.com/bnpv-ui/pages/start.xhtml. This helps you estimate whether you are going to pass the NPV test. Gather as many inputs as you can and then run the test yourself. If you’re in danger of failing, you may need to consult with an attorney about how to adjust some of your spending, expenses, income, etc., to end up with a more favorable result.Use your 30-day timeline
You typically have 30 days from a NPV denial under HAMP to appeal. Use your 30 days to request and review all inputs used. Don’t wait until the last minute—request them at the outset of the 30-day period.Ask for the re-default rate used
Lenders won’t tell you what they used here unless you request it. Ask about the rate and if it’s over 9%, this may be too high. The good news is that the lender may not be able to support why they used this number. 40% is the number that is automatically plugged in to most lenders’ NPV calculators. However, re-default rates aren’t standardized and the lender should change it based on your actual re-default rate. Re-default rates are published based on the investor, type of loan, years behind, etc. The numbers vary and are often well under 40%. You’re entitled to your own number based on your mortgage history. Make the lender actually go do research to give you an accurate re-default rate.Where the true problems lie with the NPV test
When investors and the government decided that this test was the best way to review modifications, it was implied that the lenders would take it upon themselves to learn how to conduct the test correctly. They didn’t do that.
Lenders didn’t invest any time in perfecting their system or training their representatives to run the test correctly. Often, the representatives responsible for running the NPV analysis don’t understand the basic principles of the test or how the inputs affect the outcome.
Like any math equation, if the numbers are off, the result will be wrong. Many homeowners receive denials because someone working internally for the lender entered the wrong numbers.
Most NPV conversations have to occur with a supervisor, sometimes even a second or third-tier supervisor. You have to work your way up the management chain before you get to someone who knows what’s going on and how to respond. Somewhere, within each institution, are people who understand the NPV test, but they’re rarely the people who actually run the test or issue the denials.
The nature of the test is complicated and nuanced. It takes training and commitment to accuracy to be able to get a correct result. We’ve seen lenders fraudulently claim they performed the test when they didn’t. We’ve seen lenders issue a decision when they can only produce four or five inputs used (there are more than 20 inputs needed to run an accurate test). We’ve had homeowners receive an NPV denial, only to find out that the NPV test wasn’t run because the lender suffered a “glitch in their system.” Lenders rarely ask for more information and they refuse to do the research required to ensure they have accurate inputs.
In sum, NPV tests are difficult in and of themselves. They are further complicated by most lenders’ incompetence and refusal to execute them correctly. The result is that homeowners are often left with a denial they don’t understand, a convoluted test, and no one to hold accountable for their denial.
Our recommendation: Get to a supervisor. Ask for your inputs. Make the lender defend their test result before you accept your denial.
Lenders known for conducting accurate NPV tests:
- Specialized Loan Servicing (SLS)
- Select Portfolio Servicing (SPS)
- Chase (certain investors)
- Wells Fargo (certain investors)
- Caliber Home Loans
Lenders doing something shady with their NPV tests:
- Wells Fargo (certain investors)
Under the WA State Foreclosure Fairness Act (FFA), homeowners may be eligible for mediation. Mediation is typically very beneficial for homeowners in any stage of the loan modification process. Here are some things to know about mediation and NPV tests:
Lenders are required to produce the NPV inputs used as part of the mediation process. Make sure your representative ensures these are part of the beneficiary’s document package per the FFA. NPV inputs should accompany all denial decisions and they should be comprehensive.
Use the NPV inputs to put your lender on the spot during the mediation session. Ask that they pull the inputs used and support where they came from. This is usually a great way for the lender representative to prove whether they have actually done the research necessary to conduct a valid NPV test or whether there is more work that needs to be done.
Please know that this isn’t tailored legal advice. We would love to help you with your specific situation. Please fill out this form for a free consultation with one of our attorneys.