HAMP modifications part 1 of 7: NPV, the “secret formula” that determines your eligibility

There is a “secret formula” which is determining whether you are eligible for HAMP (Home Affordable Modification Program) loan modification. It is called the NPV-the “net present value”.
What is this formula? I found two descriptions:
Description #1: This first is a brief description from the “Frequently Asked Questions” portion of a government document:
“Apply a Net Present Value (NPV) test to determine whether the value of the loan to the investor will be greater if the loan is modified (factoring in the government’s incentive payments) [versus if the loan is foreclosed and the foreclosed house sold by the foreclosing lender]. If the modified is not of greater value [greater NPV] the investor and servicer may still modify the loan. However, modification in such cases is not required. Please note: Your servicer may re-run the NPV test before the modification becomes official if they receive new information that could affect your NPV score. If the modified loan is of greater [NPV], the servicer must offer you a modification under HAMP, and, if you accept the offer, will put you on a trial modification (typically three months) at the new payment level. [ ] Misrepresenting any information required for the Home Affordable Modification is a violation of Federal law and has serious legal consequences.” Revised June 8, 2010, a copy is available at: http://www.makinghomeaffordable.gov/about-mha/faqs/Pages/default.aspx
Note that a list of servicers that have agreed to participate in HAMP modifications is available at a government website. Also included is a list of those HAMP programs (there is more than one HAMP program-adding to the confusion) in which the respective servicers have agreed to participate at: http://www.makinghomeaffordable.gov/get-assistance/contact-mortgage/Pages/default.aspx
Description #2 of NPV test-This description comes from an on-line post by an “in the trenches” individual who has claimed to have participated in and successfully completed 100 modifications:
January 2010: “The “NPV Test” (NPV is “Net Present Value”) is a formula used to determine your eligibility for a loan modification under the HAMP Program. The purpose running an NPV calculation test is to decide if the investor of your mortgage is in a better profit position by approving you for a modification (basically which choice gets more money to their bottom line) or if they would have a higher profit margin by allowing the property to foreclose. This formula takes many different factors such as current value, foreclosure costs, resale time and compares this with payments on the reduced rates, how much principal they would have to defer interest free to make you qualify under 31% of your gross (pretax) income, after the other “waterfall process” steps the HAMP underwriting guideline require in order to lower your payment were first calculated, along with the risk in possible repeat default, and many other figures that are called values. In other words, it is the comparison of two formulas with multiple factors that are then compared to see which is greater in profit to the investor of your loan. The investor is usually not the same as your servicer.
If the borrower is not approved for a HAMP modification because the transaction failed the NPV calculations, then the servicer must, explain what the NPV means tell you the factors used to make the NPV decision and advise you that you may request the values used in making the calculations along with the date the process was completed within 30 days of the notice of denial. The reason they have to provide this information to you is to give you the opportunity to make any necessary corrections to the values they used as they make or break your ability to be considered eligible for the Home Affordable Modification Program.
You, or your authorized representative, can request the specific NPV values verbally or by writing to the servicer within 30 calendar days from the notice date and they must answer your request within 10 days.
If you request the NPV values and you have a foreclosure sale pending the servicer must not complete the foreclosure sale until 30 days after they deliver those values to you to give you time to correct the inaccurate values, if there are any.
Once the evidence that the NPV values used were inaccurate, the servicer has the burden to make the necessary verifications to see if the corrections are material to the outcome of the NPV.
Some values don’t affect the outcome and do not warrant a change from the original NPV. If you find inaccurate values in the NPV calculations and you follow the protocol for advising the lender then your servicer must reconcile the inaccuracies prior to proceeding with any foreclosure sale.
As always the best way to win at the loan modification game is to learn everything you can about the process so you can be empowered and successful with your loan modification and saving your home.”

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