In fragment 1 of this article, I introduced the notion that the fetch
expose Value Test is preventing loan modifications with necessary
balance reductions. Below, I give a detailed explanation of the TWO
share loan modification test and how acquire indicate VALUE affects
whether your loan modification is popular or rejected.

What most borrowers don’t understand is that a loan modification is more
than fair a simple adjustment to the loan which makes the payments
affordable; it is a complicated financial analysis for the lender and
the servicer. In fact, there is a two-part test that all loan
modifications must pass in order to be common by the lender (and qualify
for government incentives) . This is complicated and convoluted, but
it’s what every borrower needs to know in order to understand why a loan
modification might be doomed for failure before the process even
commences.

1. Front-End DTI: First, to qualify for HAMP (the Treasury’s “Home
Affordable Modification Program”), the borrower’s fresh payments for
housing debt (i.e. indispensable, interest, taxes, insurance and
association dues) must be “unaffordable” which means that those payments
exceed 31% of the borrower’s horrible monthly income. This is known as
the “Front-End, Debt-to-Income Ratio.” This is usually not a grand
hurdle because most borrowers in financial misfortune are paying well in
excess of that 31% threshold. However, some borrowers fill they need to
display the lender that they have NO income. In that status, the loan
modification will be rejected immediately because the borrower needs to
be able to reveal that a loan modification will lower the Front-End DTI
to at least 31%. If the borrower has no income (or if the borrower
artificially decreases his or her income), the lender simply can’t do
anything to glean the payment to be “affordable” (there are limits to
the interest rate reductions and term extensions which prevent unlimited
adjustments to advance affordability) . Alternatively, some borrowers
already pay less than 31% of their bad income toward their housing debt,
but have so many other bills that they mild can’t afford the mortgage
payment. These borrowers also fail the Front-End DTI test because they
are already under the 31% threshold (the lender doesn’t care that you
are over extended on non-housing debt) . So, as you can discover, the
borrower has a narrow window between making too distinguished money and
not making enough money, within which the lender could provide an
adjustment to the mortgage (e.g. lower interest rate, extend term or
gash famous) which would transform the loan from unaffordable (i.e.
greater than 31% Front-End DTI) to affordable (i.e. equal or less than
31% Front-End DTI) . However, the evaluation doesn’t slay here. This
where the rep reveal Value test comes in to ruin off the most effective
loan modification tool: the distinguished reduction.

2. derive demonstrate Value (NPV) : Next, the lender must settle whether
it will suffer a greater loss by providing a loan modification as
compared to simply foreclosing on the home and selling it. The lender
must figure out which option (modification vs. foreclosure) provides the
highest find note Value to the lender. In both a modification and a
foreclosure, the lender eventually recoups some of the money that was
lent to the borrower. In a loan modification, the lender will receive
monthly payments which include essential and interest (albeit, at a
lower interest rate than originally contemplated) over a period of 30 or
40 years. An accountant can see at that stream of 360 (or 480) monthly
payments and figure out what is it worth in “today’s” dollars (that’s
called the “pick up expose Value” of a series of payments) .
Alternatively, in a foreclosure, the lender will kill up selling the
property either at a public foreclosure auction or as an REO (bank
“sincere Estate Owned”), and, after paying the foreclosure and sales
costs, the lender will have a lump sum of money which it can (hopefully)
re-lend to a current borrower at unique interest rates. Again, an
accountant can figure out how distinguished money the lender will
receive as a rep demonstrate Value from the foreclosure and sale. At
that point, it becomes a simple mathematical calculation to choose
whether the lender receives more money through a loan modification or by
foreclosing and selling the property. That’s the win note Value Test.
Here’s the predicament for a borrower: If the lender has to
significantly slit the interest rate, or extend the maturity date of the
loan, or even carve valuable, all in an distress to comply with the
Front-End DTI test above (to accomplish that 31% target), it becomes
MORE LIKELY that a foreclosure will provide a greater recovery than a
loan modification. If so, the lender cannot approve the loan
modification and must foreclose and sell the property. It is this minute
known NPV Test that kills many loan modifications, and the borrower is
not told why they don’t qualify.