Families facing foreclosure, like it or not, are enrolled in the College of Hard Knocks, and this series of articles will be a course catalog for new and seasoned students to use as a reference when planning and evaluating their educational directions as they proceed to earn a degree which may one day either hang on a wall or be taped to the side of a shopping cart.
This article deals with the topic of NPV: referred to in financial circles as Net Present Value. NPV is a calculation process used to evaluate business investment decisions. NPV is basically a measurement of future cash-flow or net benefits that can be derived from a particular investment, less the cost of the investment. A positive NPV indicates a sound investment. A negative NPV indicates the investment should not be pursued. Corporations tailor their NPV calculations, and NPV calculations are not easy to understand for non-financial people.
It is the goal of this article to provide awareness to the general public about the process of NPV as it applies to loan modification eligibility, and to remove the shroud of secrecy that allows a well-intentioned tool to be employed to fulfill one-sided agendas.
In the world of lenders, foreclosure and loan modifications, NPV plays a major role. The treasury provides an NPV model for banks to use as a way to determine whether or not modifying a mortgage is feasible. The design and intent was to protect the investment of both the lender and the borrower. But like so many inventions that were created for the good of mankind, loan modification NPV calculations can be skewed to achieve a personal agenda — not so win/win as win-huge/lose painfully as well.
NPV calculations are implemented as a part of the Home Affordable Modification Program. And other loan modification programs that are ‘in-house’ programs also may use NPV as a way to calculate risk. And on the surface that should be good news. But it’s only as good as the data used is valid and accurate.
This author is trying to avoid opinion, but a little research — or a lot of research better yet — will reveal a common thread in borrowers’ pursuit of loan modification. A mysteriously common phenomenon of documents that are commonly ‘misplaced’ by the bank.
With respect to an NPV calculation, strategically lose a few bank statement, string some low-income months together — and viola, you have an income too low to qualify and a very credible excuse to deem a deserving borrower as ineligible for a modification.
But if that is not enough, let’s consider this. One of the biggest services of sub-prime foreclosure mortgages today is JP Morgan Chase. And thousands of these mortgages came their way via the FDIC control of WAMU (A big player in sub-prime mortgages). They paid about 3-cents on the dollar for these mortgages. So they paid $9,000 for a a $300,000 mortgage. Good deal, hugh? The acquisition of these mortgages by JP Morgan Chase was an even better deal than the way Ross buys close outs to sell cheap. But Ross passes the savings along to their customers. As we will see, Chase has another plan.
To make the treat even tastier for Chase, JP Morgan Chase acquired the right to claim as a loss up to 80% of the paper-loss on the sale of each foreclosed property: I.e., if they sell a foreclosed home with a $200,000 principal for $100,000, they can claim an $80,000 loss on their taxes.
Now let’s look again at the NPV calculations that Chase uses to cry to the government that offering a modification to these borrowers is unsafe and unfeasible:
NPV is designed to determine the soundness of an investment, and the resulting cash flow comparisons. Well if Chase uses as their investment value the FULL principal of the loan, then one would feel sorry for the bank and spare them from a risky relationship that would jeopardize this major investment. After all pulling $300,000 out of your pocket to give to a high risk borrower should entitle you to more interest so you can cover your loses from all of those similar borrowers who will default on their loans. BUT, only $9,000 came out of their pockets. Shouldn’t that figure be used to evaluate true risk as well as profit potential?
Well let’s play the devils advocate and say this: If Chase had the good fortune to buy valuable loans at three-cents on the dollar, why shouldn’t they be greedy and profit from them to the fullest. No one is doubting that if you pay $9,000 for a $300,000 mortgage and you throw the borrower and family out on the street, sell the house a second time and collect a tax benefit for your losses, you can make more money than if you modify a loan and keep a roof over a hard working, deserving family. Business is business and no one give out hand outs for free! But isn’t the bank (a much less needy recipient getting handouts on a regular basis by the plans in effect today. And ironically at the cost of the very homeowners that are having their homes sold out from under them
And as for the moral right to be living in the property: Many of these homeowners have been paying purchase deposits, interest to the bank for years and years, renovating their property and investing hundreds of thousands of dollars as compared to the $9,000 ‘investor’ who feels morally obligated to put families in shopping carts so they can sell the property a second time for even more profit!
Perhaps NPV should stand for Nice People Victimizer… Because in the hands of unscrupulous sub-prime mortgage lenders, that is precisely how it is used.
In the case of foreclosed homes, many scenarios exist. In the case of loan modifications many scenarios exist. But the purpose of this article is to disclose a common phenomenon, and pass no judgement upon it, but present some facts as food for thought. Because it is the opinion of the author that we need to be more observant, open minded and receptive to alternative approaches when the ones being used to date are failing.
Mortgages in default are at a record high, but they are not all equal. A very special part and large part of the homes facing foreclosure today fall under the category of sub-prime mortgages. These are mortgages offered to people who are considered higher risk. Higher risk doesn’t necessarily mean lower income, or morally challenged. Many of these borrowers were hard-working families who always paid their bills who happened to have sole proprietorships without W2 documentation for income, and many were, unfortunately targeted for these high interest loan and adjustable rate terms that were destined to fail simply because they were minorities. Not too many years ago businesses were built and grown around hard-selling sub-prime mortgages to high rist people. And in the course of doing so, very few rules were beyond breaking for the bottom line: get the loan approved!
And like many things that fall under the category of prejudice, if the rules apply to everyone, and are not changed in the middle of the game or changed for just some players, everyone is treated the same and who’s to complain?
But long before the foreclosure crisis reached frightening and foreboding levels, the financial makers and shakers knew that the bottom would fall out, and rather than sharing this information to avert families being thrown on the street, treated the situation as if it was an insider-trading tip and opportunity for those in the know — the small minority of people on the planet who need the money the least — to profit from the families on the planet who need the money (and roof) the most.
When a lender really reaches into its pocket to fund a loan, there is great incentive to convert a trial modification to a permanent one. There are these kind of lenders out there with 85% conversion rates. When a lender pays 3-cents on the dollar for mortgages, the incentive is exactly the opposite. There is no profit-motivated logic to a quick, interest-lowering permanent modification when the alternative is to put instant cash in the bank’s pocket and reap a tax benefit for desert.
So sub-prime borrowers are used to receiving letters like this after they conform to trial modifications for three months time after time: “Your request for a loan modification was deemed ineligible as a result of an NPV calculation as required by the Home Affordable Modification Program.
Yes, maybe NPV should stand for Nice People Victimizer… Because in the hands of unscrupulous sub-prime mortgage lenders, that is precisely how it is used. The value of the calculation is only as accurate as the figures entered by the underwriter and can be made to produce any desired effect.: positive or negative. But shouldn’t the risk be calculated in proportion to the size of the investment: $9,000 versus $300,000?
There are so many reasons why sub-prime lenders want to keep borrowers in trial modification limbo. Carrying a bank owned and managed property can cost tens of thousands each year. Having owner occupied care givers for property the bank intends to eventually re-posses is so much more cost effective (albeit immoral) plan! Then there are the technical aspects to the bank kicking these people out on the streets today. In many cases the bank can not even prove they are legally entitled to the property. The actually note often passes hands from one company to another without respecting the required signatures, paperwork and notary processes. So, the note may not even be in the possession of the bank that borrowers are paying each month. And buyers of foreclosed homes may find themselves without a legal title to the property they purchased.
So along with the letter telling the borrower that they were deemed ineligible for a permanent modification is an invitation to apply for a new one. This guarantees more interest payments for the bank, a free care-giver for the property, and avoids the tens of thousands the bank would need to pay to keep the property secure and maintained each year it goes unsold.
Like the ingredients in the food we feed our children, some things are safer disclosed: Let’s keep the banks honest. Let’s push for disclosure in NPV calculations:
What is the actual investment?
How are the calculations performed?
What are the documents used to derive the values?
With this information available to the borrowers, their representatives and the government agencies overseeing them, bank will be a lot more family and borrower-friendly.