Why Is NPV So Important?

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 applicable 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 Test.  NPV is basically a computer program that takes into consideration all of the information related to the loan modification application as well as pertinent information related to the borrower’s existing note and determines, for the investor, by which avenue the investor will lose less money.  In other words, if, after taking everything into consideration, the NPV Test determines that the investor will lose less money by modifying the loan rather than foreclosing, the homeowner will PASS NPV.  However, if the computer determines that the investor will lose less money by foreclosing, the homeowner will FAIL NPV.

The factors used in the 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, new proposed loan balance, amount (if needed) of principal deferment or reduction, etc.

In most cases NPV has the final say on whether or not a homeowner will obtain a loan modification.