What Others Have Written About the NPV Test You Need to Pass to Get a HAMP Loan Modification

One thing I’ve learned from homeowners about applying for a loan modification is that it’s the uncertainty that can nearly kill you.  Trial modifications can often go on for many months, in fact I heard from someone last week who had been in a trial… more like “on trial”… for 14 months!

Homeowners and industry experts have drawn a variety of conclusions as to the causes behind this outrageous and insufferable situation.

There are many that believe it’s simply the banks being evil and not wanting to modify loans, preferring instead to foreclose in almost every case for a variety of clandestine incentives.  At the opposite end of the spectrum, others lean towards the argument that banks and servicers are part overwhelmed and part incompetent, that they are struggling to contend as best they can with an extremely difficult problem.  And then, it should go without saying, there are those that simply don’t care, choosing to believe that those suffering the indignity of a foreclosure are simply deserving of their fate.

After much investigation and consideration, and being someone in the middle of the storm in the sense that I regularly hear from homeowners and various other industry experts on the topic of loan modifications, I’ve come to understand that it’s not any one thing… that there’s no discernible pattern to what goes on when applying for a loan modification.

On any given day I will hear from someone saying that Bank ‘A’ is a nightmare, and an hour later another will say that Bank ‘A’ is great to work with… it’s become clear to me that the only thing consistent about the situation is the inconsistency.

And I’ve come to realize that it makes a great deal of sense that such inconsistency surrounds the process of trying to get a mortgage modified… while lenders and servicers as organizations are very assembly line oriented, loan modifications are a handmade car.  Each borrower applying for a loan modification comes to the process based on an entirely different set of circumstances, while each person on the lender’s or servicer’s side of the equation, has their own perspective, skill set, and work load at any given moment.

That was part of the thinking behind the Home Affordable Modification Program, or HAMP for short, to bring some hard and fast rules and qualifying criteria to the process of getting a loan modified.  The “Standard Waterfall” test, for example, that is used to determine a qualifying rate, term and payment for a modified loan, is part of HAMP’s attempt at standardizing the modification process, but there are other qualifying factors involved, such as the infamous NPV test.  And the NPV, since it has not been disclosed to the public, feels anything but standardized as far as homeowners are concerned.

I’ve written several articles about the so-called NPV test homeowners must pass in order to qualify for a HAMP loan modification, and most recently have endorsed a platform that produces a report homeowners can send to their lenders or servicers called the REST Report.

The Treasury Department has not released the NPV formula, but the REST system produce results that should fall within HAMP guidelines so a homeowner can have an idea whether or not they pass the NPV test required by HAMP, before deciding to apply for a loan modification.

Homeowners that have sent the REST Report to their lenders and servicers are already reporting positive results, and a discussion of those results is presented at the bottom of this article.


First, however, here’s an article published by ProPublica on September 15, 2009.  I’ve printed it in its entirety, but you can read it on ProPublica HERE.

The Secret Test That Ensures Lenders Win on Loan Mods

“NPV Test: Failed.”

That was the red-lettered verdict on the computer screen of a CitiMortgage negotiator in June. The result: An 83-year-old widow in Illinois was denied a loan modification through the Obama administration’s Making Home Affordable program, even though the employee admitted in an e-mail, “I am unable to come up with a reason for the denial.”

The Net Present Value test is a complex computer model used by loan servicers to determine whether a homeowner qualifies for the federal loan modification program.  The test compares two scenarios – modification and foreclosure – and determines which would be more profitable for the lender. If it’s foreclosure, the lender has no obligation to modify the loan. But the model is a black box. What goes in isn’t entirely clear, and what comes out isn’t always reliable.

The Treasury Department has refused to release the exact formula for the NPV model, bringing criticism from homeowner advocates and industry experts. Cloaking the NPV formula in secrecy makes it difficult to identify any potential flaws in the design of the program, which has generated fewer modifications than anticipated [1]. There are assumptions built into the model, and they may not be the right ones, said Diane Thompson of the National Consumer Law Center. “Someone needs to be able to review it.”

In congressional testimony last Wednesday, Michael Barr, assistant secretary for financial institutions, said that the Treasury Department was taking steps toward “greater disclosure of the NPV evaluation.” Full disclosure would bring the department in line with the Federal Deposit Insurance Corp., which made public the NPV formula [2] (PDF) developed for its loan modification program, on which Making Home Affordable is based. In the meantime, a Treasury spokeswoman responded to all questions by pointing to an overview of the model [3] (PDF) available online.

In it, the department says that the NPV is an “objective test” that standardizes the process for evaluating mortgages under the program.

In testimony to the Senate Banking Committee in July, Thompson said that homeowners and advocates need access to the model to determine whether loan servicers have used the test accurately — or at all. Without it, she said, “homeowners are entirely reliant on the servicer’s good faith.”

She said that she had heard many anecdotal reports about servicers entering inaccurate information into the model. Because the results give little indication of which variable is to blame, there’s little recourse to challenge a lender’s refusal to modify. Nor is there an opportunity for the homeowner to correct the problem.

An additional concern is whether servicers are even using the test for all candidates. Irwin Trauss, supervising attorney at Philadelphia Legal Assistance, told a House Judiciary Committee panel in July about a homeowner who was denied a modification by Wells Fargo, even though “there was no suggestion that the NPV test … was even done.” When his organization brought the case to Fannie Mae, Wells Fargo was “embarrassed into” reversing its decision, according to Trauss. Wells Fargo did not respond to a request for comment.

The lack of transparency is also vexing because certain variables in the formula – like home value, the estimated time it will take to foreclose, the risk of default and estimated foreclosure costs – are subjective and could be improperly assessed, industry experts say.

“It’s more art than science,” said Guy Cecala, publisher of Inside Mortgage Finance. “Who knows whether the borrower will default, what the value of the property is, what will happen to home values,” he said. “I’m skeptical of all of it.”

“The valuation of a house is a very variable thing,” Trauss said. “A real estate agent drives by and gets a price, but it’s fairly worthless and subject to being overstated or understated depending on the lender.”

Nathan Reynolds, a mortgage broker assisting the 83-year-old Illinois homeowner with her loan modification on a pro bono basis, was given the rare chance by a CitiMortgage negotiator to see the actual numbers plugged into the NPV — and Reynolds insists that the company used an inflated home value. “They just pulled some bogus appraised value out of the air,” he said.

Mark Rodgers, a CitiMortgage spokesman, did not respond to questions about the house value, saying only, “We are pleased to have identified a solution for this borrower.” That solution is a modification requiring monthly payments that are about $900 less than she is paying now, but roughly $200 more than they would have been under the Making Home Affordable plan.

The purpose of the NPV test is to indicate to lenders how to make the most money off of a particular borrower. Ironically, homeowners who have more equity in their home may be at a disadvantage.

A “huge driver” of the test, according to Thompson, is the relationship between the current value of the home and the unpaid portion of the loan. If a house is worth more than the remaining mortgage balance, “there’s a benefit to the investor from foreclosing. It will recover the entire value of the loan if it forecloses, not if it modifies,” she said. The impact of this variable, however, can be offset by other considerations, like the amount of time it will take to foreclose or the likelihood of foreclosure.

If the NPV test ultimately churns out a “negative” result, meaning the lender will make more money by denying the modification, the homeowner won’t get a Making Home Affordable modification unless the lender agrees to take a loss.

“Even though the administration is promoting loan modifications, they’re still operating from the premise that ‘we don’t want you to make loan modifications that aren’t going to make more money than a foreclosure,’” Cecala said. “This is very different from what community groups see as the (program’s) purpose.”

Clearly, the NPV used to determine HAMP qualification is an issue, and it’s important that anyone considering applying for a loan modification understand that even though it appears that they qualify for HAMP, its very possible that they don’t simply because they don’t pass the undisclosed NPV test.

The REST Report uses a version of the same software used by lenders and servicers to determine HAMP eligibility.

But that’s not all the REST system will do for a homeowner applying for a loan modification.  Homeowners use the REST Report by sending it to their lender with their supporting documentation.  It’s an easy to read 11-page document that walks whoever is reading it through the entire loan disposition analysis that was conducted by the system producing the report, and it concludes with comparisons in financial terms of the costs to the lender associated with various outcomes including foreclosure.

Should you not qualify for HAMP, or pass the NPV test for whatever reason, the REST Report shows your lender or servicer the Net Present Value of several other loan disposition alternatives, compared with the cost of foreclosure.  Most lenders have in-house modification programs that are outside of HAMP, and by sending in the REST Report, you can only have a better chance of being approved under such programs. It also shows whether you qualify for the HAFA short sale program.

REST Report Already Reporting Results…

Although the REST system has only recently become available for use with homeowners, it has already started to produce meaningful results that stand out from the process people report being put through when not using the report.

One individual this past week, who had been trying for nine months to get a household name bank to agree to a modification… with no progress and no luck whatsoever.  He had also consulted with several attorneys and other mortgage experts, and was told that he probably would be turned down.

First of all, his loan of $900,000 exceeded HAMP’s limit of $729,750, so he would be applying for an in-house modification, and therefore there wouldn’t be any published rules to follow.  And secondly, it was questionable whether he could now afford a fully amortized payment on a mortgage of this amount.

It was me who suggested that he run a REST Report and send into his servicer.  He was skeptical, but my argument was simple… at this point it couldn’t hurt.  Clearly, what he had been doing wasn’t working, and he could soon be receiving a Notice of Default and the foreclosure clock would start ticking away.

He agreed and a little under two weeks ago we entered his information into the REST platform and ran the report, which of course showed him as not qualifying for HAMP, but did show everything else in the way of financial comparisons using alternative modification strategies.  He sent it to his lender, and frankly, didn’t expect anything different in terms of a response than what he had been receiving for the last nine months… which was essentially no response at all.

Last week, which was about a week after he had sent his REST Report to his lender, he received a response from his servicer… and they were offering him a loan modification in line with one of the alternative strategies shown on the report.  His payment would drop from close to $4,000 to $2,200 during the trial, and then adjust a bit lower if he made his trial payments on time, and his loan was permanently modified.

I have to tell you that both he and I were more than pleasantly surprised… perhaps a better word would be shocked… at how quickly the report led to something positive happening in his specific, and difficult case.  Not only that, but he’s not the only who has reported a similar success after using the REST Report, in one way or the other.

Now, let’s be very clear here… we’ve run fewer than 200 reports, so it’s too early to be making any claims that we know what happens every time, but I think I can say with confidence that the report does make the analysis of the loan easier on the lender or servicer.  Instead of receiving pieces of a puzzle, the REST Report presents the borrower’s entire picture in a very clear and organized format, so a lender can immediately see the case being presented, and I believe this is why, in numerous instances, when sending in the REST Report, borrowers have received responses much faster than anyone expected.

I don’t think there’s any question that sending in the REST Report is an improvement over applying for a loan modification without it, because by submitting such a loan disposition financial analysis report generated by a version of the same software used by lenders and servicers, you would have to think that the outcome would be at least somewhat better than sending just your application along with paycheck stubs and tax returns, hoping that the bank will figure it out correctly.

So, regardless of whether you are qualified under HAMP or not, I really believe you should consider running the REST Report before you start the loan modification process or even if you’re already in the middle of the mess I know it can be, and often is.  If I didn’t, I wouldn’t be writing about it.

For more on how & why to get & use the REST Report, send email to:


A member of my team will get back to you PDQ, as my mother used to say… meaning “pretty darn quick”.


Full Disclosure: I worked without compensation for ten months with the company that developed the platform in order to make the REST Report available to attorneys and homeowners, and as a result, I did agree that Mandelman Matters would receive a small percentage of each report run, but you may be assured that the amount is nowhere near enough to get me to recommend something to homeowners that I wouldn’t use myself in the same situation.

I’m at least as aware as anyone about how much crap there has been out there that has been pushed on homeowners as being important and valuable, and I truly hope that readers can still separate the wheat from the chaff, as it were.

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