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What Is Net Present Value NPV & Why Is It So Important for loan modifications?

What is Net Present Value NPV?

Net Present Value NPV is an extremely important test for any loan modification program.  In general, there are 3 major tests that every lender uses when attempting to determine whether or not a homeowner qualifies for a loan modification.  The first test is the Hardship Test.  Homeowners must have a satisfactory Hardship before a lender will agree to review a loan modification file.  In other words, they are willing to entertain a loan modification if a homeowner has a legitimate reason for needing one.  Lenders are in business to make money and they are not going to adjust or modify the terms of an existing agreement without a valid reason.  The second test lenders use when analyzing a loan modification application can be called the Affordability Test.

The Affordability Test is when a lender takes the financial information supplied by the homeowner and analyzes it against the investor guidelines.  The resulting payment and necessary interest rate; amortization term and principal deferral/reduction (if needed) needed in order to make the proposed payment are then input into the third test, the Net Present Value NPV Test.  Net present value NPV is basically a computer program that takes into consideration all of the information related to the loan modification request file and determines for the investor by which avenue the investor will lose less money.  In other words, if, after taking everything into consideration, the net present value NPV Test determines that the investor will lose less money by modifying the loan rather than foreclosing, the homeowner will PASS net present value NPV.  However, if the computer determines that the investor will lose less money by foreclosing, the homeowner will FAIL net present value NPV.  The factors used in the net present value NPV Test are numerous, and include, but are not limited to, the following:  current payment, new projected payment, old interest rate, new interest rate, monthly escrow of property taxes, monthly escrow for hazard insurance, unpaid principal balance, current market value of property, current remaining amortization term, new proposed amortization term, amount (if needed) of principal deferment or reduction, etc.

Net Present Value NPV has the final say on whether or not a homeowner will obtain a loan modification. 

If a homeowner is denied a loan modification based upon NPV failure the lender will typically send a denial letter to the homeowner along with a NPV Input Values Chart (“NPV Chart”).  The NPV Chart is an extremely important document that sets forth the fields and values used by the lender in analyzing your loan modification application.  A homeowner who receives a NPV denial has 30 days from the date the homeowner receives the denial letter to file an appeal of the NPV test based on an error(s) in the NPV Chart.

 For a professional that knows how to read and interpret the data on the net present value NPV Chart the information is extremely valuable.  This data is a window into how the bank interpreted a homeowner’s loan modification application and what values they used for fields such as credit score, property value, property valuation type, data collection date, etc.  The net present value NPV chart typically has around 34 fields populated with data used in the net presetn value NPV analysis.  The fields include data collection date, imminent default flag, investor code, unpaid principal balance at origination , first payment date at origination, product at origination, next adjustable rate mortgage (ARM) reset Rate, unpaid principal balance before modification, principal and interest payment before modification, monthly property tax payment, monthly hazard insurance payment, proposed principal and interest payment, proposed amortization term, proposed interest rate, proposed principal reduction, proposed principal deferment, etc.  Every field is equally important in analyzing whether or not the NPV denial is accurate.

 Appealing net present value NPV results can be difficult for a homeowner because lenders presume that the data collection and net present value NPV are correct.  Additionally, the lenders’ internal appeal process is typically not run efficiently.  Usually, a homeowner can only communicate through a CRM and not the individual at the lender that input the data into the net present value NPV test.  However, if a homeowner believes that an error exists on their net present value NPV results time is of the essence.  The homeowner should either file for an appeal or consult with someone familiar with loan modification  underwriting guidelines and net present value NPV tests.

 It is not uncommon for a net present value NPV Chart to have one or more errors in it.  Whether or not the errors are material enough to have changed the final decision is a more difficult analysis.  Some errors are trivial in nature while others are more substantive.  Either way it is important to determine the accuracy of the values used to populate the net present value NPV fields.

 The best advice is to find a competent 3rd party (not yourself and not the lender) and get an expert opinion on the NPV denial.  If you would like more information regarding loan modifications and net present value NPV please visit


July 23rd, 2017

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