Information on the Net Present Value Test and Failed Loan Modifications

Hi, this is Derik Lewis with Lawyers Realty Group and we are Southern California’s leading short sale team. I’ve been getting a number of calls recently from people who have received letters from their lender denying their loan modification based upon the net present value test. I have a three part blog on the net present value test and if you want to go see a detailed explanation, you can take a look on the website, and look at our blog section.

I wanted to touch on it briefly here and give you an idea of what I think might be going on. When you apply for a loan modification, there are really two tests that the lender has to go through. One is a fairly easy concept, it’s the affordability concept. You take a look at your gross income, and the guidelines say you can afford about 31% of your gross income towards your housing debt. That’s your mortgage payment, your taxes and your insurance and your HOA. If you’re above 31%, the lender can reduce their rate and extend the term, and if they get you to the 31% threshold by doing those things, then you are approved for the first part of the test.

The problem for a lot of people is the second part of the test, the net present value concept. In a nutshell what that is, the bank looks at the value of your property and try to determine if they were to foreclose and sell, how much money they would net in that sale. What they do is compare that amount they would net in that sale vs. giving you the modification you would need to get to the affordability rate. They are trying to see which one has less of a loss to them. Both of them will be a loss, but which one is the least. If selling the property gets them more money, then their guidelines dictate that they have to sell that property rather than give you the loan modification. So that’s the general concept of net present value. I have looked at some of the numbers from people that have received these letters and for the most part, values in California are so low compared to these mortgages that it’s hard to imagine that they really did fail the net present value test. So I’m suspicious at best. But I’ll leave it at that. Visit our website for more information at, were we are Southern California’s leading short sale team. Just remember that your lender has a lawyer and you should too.