As a follow-up to my recent post, Strategic Defaults vs. Financially Prudent Decisions, I want to address the government and lending industry’s use of the NPV Test in approving or disapproving various distressed housing solutions, such as loan modifications, short sales and deeds-in-lieu of foreclosure.
What is most problematic about the use of the NPV Test is that the methodology need not be disclosed to the borrower-applicant. All data are carefully guarded. The only thing borrowers are told is whether the test results were positive or negative.
However, there are many different types of information that go into NPV Test protocols. While some is purely objective, such as gross or net income, etc., some is subjective, such as the fair market value of the distressed property, the actual amount of the arrears, and penalties, fees, etc. This is information about which people may disagree. Ignoring the risk of simple input error, there is the more serious risk of permitting someone to make independent decisions about certain input data, without having to account for that decision.
Moreover, the MHA NPV analytics are not mandatory. Loan servicers and banks may use their own proprietary models. So even if you thought you understood the government’s NPV protocol, there is no assurance that it will be the one used by your servicer.
For a variety of reasons, it would seem only fair that if I’m told I flunked a test, I should be provided with an explanation. However, what makes the NPV Test even more Kafkaesque is the fact that borrowers aren’t even give the opportunity to see the test questions! They are merely told to supply facts and figures, not really knowing how or why they will be used. Figuratively speaking, the processor controls both the questions and answers with no borrower involvement over the accuracy of the conclusion.
There is a sort of “Star Chamber” appearance to the current process. Without requiring disclosure of the supporting rationale for the NPV Test results, there can be no accountability. For most people, whether they will keep or lose their home is one of the most important events of their life. The sheer importance of the process demands transparency. It is this lack of transparency that has given the loan modification process such a bad name.
At page 828 of the new 2300 page Financial Reform Law (which will probably generate an equal number of pages in interpretive regulations), in offering HAMP modifications, the Secretary of the Treasury is called upon to do the following:
- Establish and maintain a site on the Internet that provides a calculator for net present value analyses of a mortgage;
- Make a reasonable effort to include on the site a method for homeowners to apply for a mortgage modification under the Home Affordable Modification Program;
- Make publicly available the methodology and computer model of and “all formulae” used for calculating net present value of a mortgage together with all non-proprietary variables used in the analysis;
- Prominently disclose if the participating mortgage servicer uses a method for calculating net present value that is different than the method used by the calculator appearing on the site.
Of course, the $64,000 question is whether the Financial Reform Law and its interpretive rules, will ever be implemented in time to help today’s millions of distressed homeowners. But until complete accountability and transparency are achieved, the process will never be viewed as fair.