How The NPV Determines Chances of Loan Modification

NPV stands for net present value and is a calculation used to determine whether a homes present value may justify loan modification. Because of the fluctuations in the real estate market, this number may fluctuate each quarter dramatically. This number is based on several factors including, but not limited to location of the property, property values in the surrounding area, condition of the property and other factors.

NPV Explained

Understanding the NPV is the first step in understanding the math behind loan modification. The anticipated net present value of a home loan is a default probability-weighted average of the loan's recovery values in foreclosure and the discounted value of the payments on mortgages that do not foreclose. Most loan loss models assume that approximately 70 percent of home loans that are delinquent will end up in foreclosure. The redefault rate for modification loans is also part of the equation. An estimated 40 to 50 percent of modificaitons are at risk of redefault. That is because a borrower in distress often has difficulty recovering from financial problems and eventually falls into default on the modified loan in the same way they did on the original loan. Borrowers who have significant equity in their home at the time of loan modification are less of a default risk.

All of this data is utilized to arrive at a determination as to whether a particular borrower is a good candidate for a loan modification. It is complicated math used to come to what could be a life changing decision for a borrower. The NPV may seem complicated, but you can better understand it by knowing that it takes all of the statistical mathematical data about your loan and assesses the likelihood that the lender will be more likely to benefit from modification or not.

Loan Modifications and NPV

In evaluating a loan modification the lender should compare the anticipated recovery under the loan modification with the anticipated recovery through foreclosure based on the net present value. Whichever option maximizes recovery for the lender should be utilized by investors. 

Getting Legal Help

Because loan modifications and foreclosures are quite complex, getting the help of an experienced attorney when dealing with either of these circumstances can prove helpful. An attorney can explain the law and the process for you. If you have specific questions, you may ask them in a confidential setting and trust that your privacy will be protected.