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Loan modification calculations

LOAN MODIFICATION FAILURE: WHAT YOUR LENDER ISN’T TELLING YOU ABOUT “NPV” AND PRINCIPAL REDUCTIONS (PART 2 OF 3)

A common refrain among borrowers facing default and seeking a loan modification is the following: “Why doesn’t my lender just reduce my loan balance to the current market value? They aren’t going to get any more than that at a foreclosure sale.” While it is absolutely true that a lender can only obtain current market value if it forecloses and sells the property (in fact they will probably get LESS), this argument ignores the complex financial analysis that the servicer (that’s the company responsible for collecting payments and reporting to the lender) must complete to make sure they are limiting the loss to the lender. The servicer MUST select the option which provides the highest recovery to the lender by using the NET PRESENT VALUE TEST.

In simple terms, if the lender reduces the loan balance to the current market value, they are stuck with 30 or 40 years of payments based upon that lowered loan balance (and possibly at a much reduced interest rate). However, if they foreclose and sell the home, they get that money (less costs) RIGHT NOW. Lenders understand that receiving a lump sum of money today is far more valuable than receiving that same amount of money over the course of 30 years or more along with the added risk of re-default. In fact, it is possible that a lender could receive LESS THAN current market value through foreclosure but still realize a HIGHER NET PRESENT VALUE by getting that money immediately as compared to taking payments over the life of the mortgage. Therefore, a foreclosure almost always generates a higher NET PRESENT VALUE for the lender as compared to a loan modification with a significant principal reduction.

So, if a servicer is obligated to limit the loss to the lender, they are simply unable to offer a loan modification if a foreclosure would generate a higher Net Present Value for the lender. The servicer CAN’T offer, and the lender WON’T accept, the modification. The home will be forced through foreclosure.

 

In Part 3 of this article, I will give a detailed explanation of the TWO PART loan modification test and how NET PRESENT VALUE affects whether your loan modification is approved or rejected.

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EXCEPTIONAL SERVICE – UNPRECEDENTED PROTECTION

LAWYERS REALTY GROUP is an attorney owned and operated real estate brokerage that was formed to help level the playing field between struggling homeowners and the banks who are threatening them with foreclosure, eviction, deficiency judgments, and collection actions.

Unlike traditional real estate agents, loan mod companies, bankruptcy attorneys, litigators and others who aggressively market their particular one-size-fits-all solution regardless of a homeowner’s future liability and financial well-being, Lawyers Realty Group provides clients with a customized analysis of their options, free legal counseling and clear direction on how to best resolve their particular mortgage issues – all without charging fees to the homeowner.

 

Derik N. Lewis, Esq., is the founder and president of Lawyers Realty Group. Derik is a California real estate attorney, a licensed Realtor® and a member of the National Association of Consumer Bankruptcy Attorneys. He graduated magna cum laude from Boston University School of Law and has nearly 30 years of real estate experience. For more than two decades as an attorney in private practice, Derik has represented California homeowners with difficult real estate matters. Derik previously served as legal counsel for some of the world’s largest lenders including Bank of America, Wells Fargo and JPMorgan Chase (he knows how they operate and how to work within their systems to help you achieve the best possible outcome). He is also a visiting lecturer at the University of Southern California School of Law speaking on real estate law, brokerage and litigation.

Professional Associations

  • Admitted to all State and Federal Courts in California
  • California Bar Association
  • Orange County Bar Association
  • National Association of Consumer Bankruptcy Attorneys
  • National Association of Realtors
  • California Association of Realtors
  • Orange County Association of Realtors
  • California Regional Multiple Listing Service

No Cost Services

Free legal analysis of all of your options, including how to limit or eliminate tax and deficiency liability.

Complete representation for the option that best suits your situation, whether you need assistance in reviewing a loan modification, filing bankruptcy, seeking a deed-in-lieu of foreclosure, pursuing a planned foreclosure or selling in a short sale.

Free Bankruptcy filing in the BK/Short Sale package.

Free legal review and fraud analysis of all solicitations from the bank, real estate agents, lawyers or others.

Free and complete short sale representation including MLS listing, marketing, negotiation, deficiency waivers and closing. You need an Attorney/Realtor® to provide legal leverage and fully protect your interests.

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