|
|
Making Home Affordable
As the old saying goes, "The devil is always in the details" and Making Home Affordable has a detail which goes by the name of the Net Present Value test. Many of the mortgages which were originated during the boom in real estate, including those considered to be toxic, were sold to investors on Wall Street, from pension funds, and insurance companies. These investors didn't have the infrastructure or experience to collect payments, prepare statements, etc. so they left the handling of those matters to loan servicers like Saxon Mortgage. These servicers interface with the homeowner on all matters, including home loan modifications. For that work, they receive a small percentage off of each of the homeowner's monthly mortgage checks as their fee.
An unintended consequence of the meltdown in real estate prices and skyrocketing default rates is there is now a conflict of interest between servicers and the investors that employ them. The foundation of that conflict is this; with monthly mortgage payments functioning as the lifeline of the servicers, their priority is to keep those payments going. To that end, granting loan modifications, even with drastic cuts in interest rates, is a much better outcome for the servicer than not receiving payments at all and/or having the home go into foreclosure. Aggressive loan modifications which benefit the servicers often hurt the investors by forcing markdowns on value of loans in their portfolio, hence, the conflict of interest.
Having experienced this conflict prior to the unveiling of Making Home Affordable, investor groups insisted that the net present value test be added to the plan to protect their interests. A net present value (NPV) calculation works this way:
1) Determine the proposed monthly mortgage payment for the life of the modified loan
2) Calculate the total return in dollars over the life of the loan , monthly payment x 12 months x 30 years = total return
3) Estimate the value of what the foreclosed home would sell for at auction
4) The highest number between the total return and the estimated selling price at foreclosure determines what action will be taken.
Motivated to keep properties generating monthly payments and out of foreclosure, servicers will negotiate the highest interest rate possible, within the constraints of the plan and what the homeowner can afford, to generate higher fees and to make sure that the net present value test comes out on the side of loan modification. With higher fees and the net present value test driving the negotiations in a loan modification, granting 2% interest rates becomes a very low priority and in some cases a deal killer for the servicers.
|
|
|
|
