Posts Tagged ‘NPV test’

Underwater Homeowners & HAMP: The Huge Problem of Negative Equity

Most homeowners who receive assistance from the Home Affordable Modification Program remain deeply underwater. The average homeowner in HAMP owes $1.50 for every dollar of their home’s value. This puts them at a greater risk of “walking away.” even after receiving a modification.

Republican critics of the program, like California Representative Darryl Issa say “It defies common sense that taxpayer money is being used to pay banks to modify loans that are likely to default anyway.”  In his usual “the free market is the answer to everything” zeal, he went on to say “In cases where the loan changes could keep borrowers out of foreclosure, banks have a clear incentive to make changes without a need for public funds.” He’s written to Treasury secretary Geithner to call for an immediate end to HAMP.

Except banks’ track record of loan modifications pre-HAMP was even worse than their record with HAMP.  The problem with banks and loan modifications, whether they’re private or government subsidized is that banks have proven singularly unwilling to do the one thing that will correct this entire mess: write down principle.

While recent changes to the HAMP program include provisions for principal reduction,  like everything else about the program,  it remains voluntary. Moreover, HAMP is designed so that the banks only modify loans from which they can profit. The entire NPV test, which is the test that determines whether someone qualifies for a HAMP modification or not, is designed to test whether it would be more profitable for the bank to foreclose or modify.  You don’t have to be an economic genius to see that it favors homeowners who are underwater since foreclosing on those folks will cause the bank to take that immediate loss. The deeper the home is underwater, the less profitable foreclosing becomes.

Of course, you also don’t need to be an economic Einstein to see that it also makes sense to bring loan values in line with the values of the properties securing the loans. I mean, that would make perfect sense, right? How can someone have a $300k mortgage on a home worth $150k and actually call that a secure investment?

The bean counters at the banks, unfortunately, don’t have too much economic sense. They just look at the dollars and cents on the banks’ balance sheets and if they’re decreased in any way, well, the sky is falling. I am not going to argue that principle write-downs won’t affect the banks’ bottom line. Of course they will. However, it’s a bit like receiving your bank statement, which , through an error shows you have a million dollars instead of only a thousand dollars. Of course, you’d much rather pretend that there wasn’t an error, and bank of the basis that you have a million dollars to spend, or invest,  but at the end of the day, that million dollars doesn’t exist. It is  just $999,000 of funny money. Mortgages that far exceed the value of the homes upon which they are secured are just as much funny money as the million dollar account error is. 

The world works differently for banks than it does for the rest of us, though. For the banks, they can continue to play with funny money, while you won’t be able to even pretend you’re $999,000 richer than you actually are for very long.

Are You NPV Positive? Know If You Qualify For HAMP Before Applying

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Imagine if you could know whether or not your HAMP loan modification application will get approved into a permanent modification before you even went though the process to apply.  Not only would you save yourself the hassle of filling out the paperwork and sending in your documentation, you’ll save money by avoiding paying trial modification payments only to be told that you don’t qualify in the end.

The banks use what is called the NPV formula to evaluate the value of the cash flows generated by your loan in a foreclosure situation as opposed to a modification situation. If the cash flow generated from modification is greater, then you are NPV positive and your modification will be approved. If the value of a foreclosure is greater, then you will be denied.

The exact formula that lenders use is a secret. Only the servicers and the Treasury have access to it, and, well, the people who helped create it. Those folks have made it available to certain persons and entities and now, for a fee, you can get your own NPV evaluation and know whether or not you pass the NPV test.

To find out how to get your own NPV analysis, send an email to

I hate spam just as much as you do and I will never sell your email address to anyone else, nor will I use your email address to market anything else to you. The only other person who will see your email is the person who will do your NPV analysis. That’s it.

HAMP To Include Assistance To Unemployed Borrowers and Incentives for Principal Reductions

HAMP logo In a welcome move, the Obama Administration announced changes to its Making Home Affordable loan modification program today that would provide incentives to servicers and investors to reduce principal balances and would provide assistance to unemployed borrowers.


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