GOP Idea: Understand the NPV Test in the Obama Housing Plan --- Then End It

By Paul   05/12/09 04:20 AM

12/04/ 2009 Update: Three ways to ensure taxpayer dollars are not wasted (HAMP even allows for criminals to get handouts)

The Home Affordable Modification Program (HAMP) established by the Obama administration is a testament to their strategic and tactical brilliance. After reading (and re-reading) the publicly available documentation, it is clear that political rhetoric does not match policy reality. However, the brilliance of the plan is that all of the rhetoric that is portrayed to the public is couched in the language of hope, responsibility and transparency --- and only when one pieces together the details of the plan do the true effects become clear: the government will (probably) be mandating a significant transfer of wealth from private sector investors to program participants, all of whom are breaking their word, many of whom are likely criminals.

The nexus of this discovery is the use of a "NPV Test" (NPV is "net present value") to determine the eligibility of borrowers for the program. The NPV test's purpose is to determine whether a lender would receive more money by writing down and modifying the loan for the borrower or by not undertaking any action. In other words, it is the comparison of two multivariate formulas, that are then compared to see which is greater. This provides the illusion that the program will be objective --- the problem is that the Obama administration is writing the test, who will take it and how it will be taken.

The true brilliance is seen in the fact that the Obama administration is making essentially all homeowners eligible by stating that all loans by Fannie Mae and Freddie Mac are eligible --- and all banks receiving TARP funds must participate in the program. (Surely forcing large financial institutions to pay for Obama's social programs is not the reason why the Obama administration is refusing to allow TARP banks to return funds --- thereby being able to opt-out of HAMP ... and I'm sure all the TARP banks just agreed to go to the back of the line on Chrysler because of their altruism.) Furthermore, the HAMP plan requires that a borrower be given a new, discounted loan, provided that certain tests are met. Not surprisingly, the inputs to determine whether those tests are met are not public --- and are completely determined by Obama appointee-dominated agencies.

Specifically, I challenge anyone to find the actual inputs of the HAMP NPV test that will determine who is required to give a delinquent homeowner a modified loan. First, examine the initial "Summary of Guidelines" provided on March 4th, it states:

  • "Parameters of the NPV tests are spelled out in the guidelines, including acceptable discount rates, property valuation methodologies, home price appreciation assumptions foreclosure costs and timelines, and borrower cure and redefault rate assumptions."

The HAMP guidelines also were released on March 4th, but no actual numbers (despite what was promised to be "spelled out" in the Summary) were forthcoming:

  • "Required parameters for the NPV Test will be published separately." p.5

As an addendum, there is a section "Net Present Value Model Parameters" --- but the problem is that there is only one actual number in these "parameters" (the discount rate) and even that can be modified. But, under the "Standard NPV Model":

  • "Complete details on each component outlined below are forthcoming." p.16

The Cure and Redefault Rates will come from:

  • "A default equation with parameters based on GSE analytics ... and Treasury ... will update these tables periodically based on incoming data." p.16

The Property Value:

  • "will be determined in accordance with the Guidelines" p.16

Incentive Payments:

  • "will be determined in accordance with the Guidelines" p.17

Other Parameters:

  • "The remaining parameters will come from data sets held or produced by the Federal Housing Finance Agency: home price forecast, valuation of house price depreciation reserve, foreclosure timelines, and foreclosure costs and REO stigma." p.17

However, if you go to the FHFA website and search for any of those "parameters," none are available on the site. None. Thus, the inputs of the formula that will determine whether a private bank is required to write down billions of dollars in mortgages is completely unavailable for public view. However, the lack of transparency does not mitigate the program's authors from dictating additional terms. As stated in the HAMP "Base Net Present Value (NPV) Model Specifications" document, when discussing assumptions detailing home prices:

  • "A servicer must use the home price projection provided in the base NPV model. A servicer does not have discretion to substitute a different projection." p. 5 (Author note: the country got into this mess based on flawed future value models --- yet the government believes that it can dictate standards for everyone to follow.)

The data is even more questionable, as the "home price projection for the program has been made available by FHFA exclusively for this program .... The projection is not based on the FHFA House Price Index." In other words, this data is a special set, not based on any official data, but servicers are required to use it. The same logic is applied to the "REO 'Stigma'" (houses foreclosed upon sell for less than similar non-forclosed homes):

  • "REO stigma values vary by state and home price, servicers are not permitted to change the REO assumptions in the base NPV model." p.5

If you have made it this far either you are a: a.) banker b.) finance geek c.) committed citizen or d.) quick study. Which means, you know why this matters: if you control almost all of the inputs to a formula, you can dictate the outcome of the equation. I've tried to access the Base NPV Model or the datasets, but they are unavailable for public view.

Thus, the Obama administration is ensuring that people who refuse to pay the mortgages they signed will receive new ones because the financial institutions holding them (essentially all TARP recipients) will be forced to use a formula that ensures the bank will be forced to hand thousands of dollars to people who cannot afford what they bought. Reasonable people can have a thoughtful discussion regarding the costs and benefits of temporary help to unlucky borrowers, but a blank check to anyone who made a bad decision with taxpayers paying for the mistakes of others is a completely different story.

Tags: Bailouts, Budget, Economics, Fiscal Policy, Housing Policy, Obama, Taxes
Discussion (10)   Permalink

Reader Comments

  1. Posted by Dan B. on Nov 9, 2009
    For reference, the inputs on HAMP are listed in Supplemental Directive 09-06 Schedule III.

    The FDIC has a publicly available NPV test on its website which is (most likely) substantially similar to the one the Treasury is using for HAMP.
  2. Posted by Paul on Nov 9, 2009
    Thanks for pointing that out, although the devil is in the details (like the data Fannie and Freddie use to calculate redefault rates and how appraisal values are calculated). For those interested, the FDIC test is here:

    http://www.fdic.gov/consumers/loans/loanmod/loanmodguide.html

  3. Posted by babette on Nov 20, 2009
    if it makes you feel any better, i can't afford my monthly mortgage payments (due to private circumstances...my payment is $1800 a month and i take home $2200 a month right now) and my loan servicer has turned my modification down 3 times.....yipeee!!!
  4. Posted by exgop on Feb 22, 2010
    Same here,

    Quailified for 7% mortgage loan when I was employed making $5000 per month. Since being laid off, I have not been able to find steady work for the past 3 years and have a mortgage payment of $1743.00 a month. My savings are now depleted and my income from temporary jobs fluctuates between $2300 and $2700 per month. I didn't qualify for refinancing because of a drop in my property value and my drop in income. and was turned down for a HAMP modification due to the NPV test that actually helps TARP Banks more than homeowners and encourages foreclosures if banks can make an extra penny by taking and reselling your house instead of modifying a loan to current market rates. YIPEEE!!!
  5. Posted by brian on Apr 3, 2010
    I agree with a lot of what you say. However, I signed my loan doc's while earning over 300k a year and now I have been laid off and my income is 1/100 of what it was for the previous 10 years. I am also a victim of barny frank and all other housing market screw-ups, but not a criminal. I lost 2 million in assets and all I want is to keep my last remaining asset... my house. Because of them, not me my house is worth 480k less than it was and I am not taking it in the shorts yat again because someone else screwed up.
  6. Posted by Stephen on Apr 3, 2010
    I completed the HAMP process and had my monthly mortgage payment lowered from $850/mth to $225/mth. I was laid off a year ago and am still unemployed and was relieved to have made it through the HAMP process after 8 months of paperwork. But, last week I received a letter from the program saying that my loan lender had denied my final paperwork because of my NPV value. I have ten days to fight this and my request for the NPV value is somehow lost in the system. I am curious to see what happens.
  7. Posted by shannon on Jul 14, 2010
    I also use to make in the mid 6 figures and bought a house with 20% down and put over $150k into it. My company went out of business in 2007 and I now also only make a little over $80k with my husband and I combined. We could easily afford the payment if were were approved for a HAMP modification but at the end of the process I was also told that I was denied due to NPV. After endless calls I finally was told that my value on my home was $551,500 and my loan balance payoff was only $517k. They did however forget to tell me that this amount was from when I first stopped paying some time back and so surely has to be higher.

    I am paying for my own appraisal as the recent sales in my neighborhood do not support their value.

    I hate to be considered a drain on society but I have paid taxes and all my other dues as a US citizen and feel that based on the extenuating circumstances of this particular market that it is only right that government try and do something.

    I do understand the NPV but I also believe that is can be manipulated by the banks to meet whatever they want the end result to be.
  8. Posted by Sheley on Jul 23, 2010
    I also applied for HAMP. My income has decreased due to loss of business directly relating to the economy. I paid my mortgage on time for 24 years before refinancing 3 years ago in order to put a new roof on my house. I have $1500 a month in income now (1/2 of what I had 2 years ago) and after going through the process for 7 months I have now been denied. Why? Because HAMP is for the lenders, not to help people stay in their homes! My house has equity of 30% so the lender wants to foreclose and sell it so that they can make money to cover their other losses. Really nice.
  9. Posted by Paul on Jul 28, 2010
    Surprised that this post received as many comments as it did, it was an attempt to break down highly technical elements of the HAMP program.

    A number of people posted heartfelt stories and comments and I thought it appropriate to respond. First, the fact that the MSM has completely missed connecting the dots on this story is testament to their utter gullibility. Banks paid back their TARP and diluted shareholders to avoid government interference, which is what the HAMP was predicated on.

    My only comment on those who are on the poor side of foreclosure/denied HAMP is that I took the other side of the bet and lost money for years. I'm still a renter, but tried to buy between 2004-2007, but was priced out of the market. Since I did not try and outbid (although my friendly neighborhood mortgage broker assumed me that I could qualify), I continued to not get a tax deduction, not build equity and not put down roots ... because the price was too high. Now, people who did realize those benefits during the boom years are in a pickle and looking for a bailout. I'm not frustrated that people pursue their best interests --- but am frustrated that I passed on the benefits of home ownership, others enjoyed those benefits and now when the tables are turned, my tax dollars are expected to pay for people who already benefited, while I continue to not benefit.
  10. Posted by Andy on Jul 30, 2010
    The NPV test basically calculates whether the cash flows from modification would be greater than the cash flows without a modification. If this is the case, the test is positive, and the servicer MUST grant a HAMP mod. If the test is negative, the HAMP mod is at their discretion. It's not politics or dark magic... it's basically just about profits. Also, if the servicer's portfolio is bigger than 40 billion, they can use their own NPV model.