Net Present Value and Failed Loan Modification

Hi I’m Derik Lewis with Lawyers Realty Group, one of Southern California’s leading short sale teams. I’ve been getting a number of calls recently from a number of people who have received letters from their lender denying their loan modification based upon the net present value test. I wanted to give you an idea of what’s going on and 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 includes your mortgage payment, your taxes and your insurance and your HOA. So if you are above 31%, the lender can reduce their rate and they can extend the term and if they get you to the 31% threshold by doing those things, then you are approved on the first part of the test. The problem for a lot of people the second part of the test is the net present value concept. In a nutshell the bank is looking at the value of the property trying to determine if they were to foreclose and sell, how much money would they net in that sale? What they do is compare that amount that they would net in that sale vs. giving you the modification you would need to get to the affordability rate and they are seeing which one has less of a loss to them. 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 will say though that I’ve looked at some of the numbers from people that have received these letters saying they have failed the net present value. For the most part, values in the Southern California area are so low compared to these mortgages that it’s hard to imagine that they did fail the net present value test. So I’m suspicious at best, but I’ll leave it at that. Again, I’m Derik Lewis with Lawyers Realty Group, one of Southern California’s leading short sale teams. Please let us know if you have any questions. Just remember your lender has a lawyer and you should too.