By Alexandra Andrews and Emily Witt, ProPublica

“NPV Test: Failed.”

That was the red-lettered verdict on the computer screen of a CitiMortgage negotiator in June. The result: An 83-year-old widow in Illinois was denied a loan modification through the Obama administration’s Making Home Affordable program, even though the employee admitted in an e-mail, “I am unable to come up with a reason for the denial.”

The Net Present Value test is a complex computer model used by loan servicers to determine whether a homeowner qualifies for the federal loan modification program. The test compares two scenarios – modification and foreclosure – and determines which would be more profitable for the lender. If it’s foreclosure, the lender has no obligation to modify the loan. But the model is a black box. What goes in isn’t entirely clear, and what comes out isn’t always reliable.

The Treasury Department has refused to release the exact formula for the NPV model, bringing criticism from homeowner advocates and industry experts. Cloaking the NPV formula in secrecy makes it difficult to identify any potential flaws in the design of the program, which has generated fewer modifications than anticipated [1]. There are assumptions built into the model, and they may not be the right ones, said Diane Thompson of the National Consumer Law Center. “Someone needs to be able to review it.”

In congressional testimony on Sept. 9, Michael Barr, assistant secretary for financial institutions, said that the Treasury Department was taking steps toward “greater disclosure of the NPV evaluation.” Full disclosure would bring the department in line with the Federal Deposit Insurance Corp., which made public the NPV formula developed for its loan modification program, on which Making Home Affordable is based. In the meantime, a Treasury spokeswoman responded to all questions by pointing to an overview of the model available online.

In it, the department says that the NPV is an “objective test” that standardizes the process for evaluating mortgages under the program.
In testimony to the Senate Banking Committee in July, Thompson said that homeowners and advocates need access to the model to determine whether loan servicers have used the test accurately — or at all. Without it, she said, “homeowners are entirely reliant on the servicer’s good faith.”

She said that she had heard many anecdotal reports about servicers entering inaccurate information into the model. Because the results give little indication of which variable is to blame, there’s little recourse to challenge a lender’s refusal to modify. Nor is there an opportunity for the homeowner to correct the problem.

An additional concern is whether servicers are even using the test for all candidates. Irwin Trauss, supervising attorney at Philadelphia Legal Assistance, told a House Judiciary Committee panel in July about a homeowner who was denied a modification by Wells Fargo, even though “there was no suggestion that the NPV test … was even done.” When his organization brought the case to Fannie Mae, Wells Fargo was “embarrassed into” reversing its decision, according to Trauss. Wells Fargo did not respond to a request for comment.
The lack of transparency is also vexing because certain variables in the formula – like home value, the estimated time it will take to foreclose, the risk of default and estimated foreclosure costs – are subjective and could be improperly assessed, industry experts say.

“It’s more art than science,” said Guy Cecala, publisher of Inside Mortgage Finance. “Who knows whether the borrower will default, what the value of the property is, what will happen to home values,” he said. “I’m skeptical of all of it.”

“The valuation of a house is a very variable thing,” Trauss said. “A real estate agent drives by and gets a price, but it’s fairly worthless and subject to being overstated or understated depending on the lender.”

Nathan Reynolds, a mortgage broker assisting the 83-year-old Illinois homeowner with her loan modification on a pro bono basis, was given the rare chance by a CitiMortgage negotiator to see the actual numbers plugged into the NPV — and Reynolds insists that the company used an inflated home value. “They just pulled some bogus appraised value out of the air,” he said.

Mark Rodgers, a CitiMortgage spokesman, did not respond to questions about the house value, saying only, “We are pleased to have identified a solution for this borrower.” That solution is a modification requiring monthly payments that are about $900 less than she is paying now, but roughly $200 more than they would have been under the Making Home Affordable plan.

The purpose of the NPV test is to indicate to lenders how to make the most money off of a particular borrower. Ironically, homeowners who have more equity in their home may be at a disadvantage.

A “huge driver” of the test, according to Thompson, is the relationship between the current value of the home and the unpaid portion of the loan. If a house is worth more than the remaining mortgage balance, “there’s a benefit to the investor from foreclosing. It will recover the entire value of the loan if it forecloses, not if it modifies,” she said. The impact of this variable, however, can be offset by other considerations, like the amount of time it will take to foreclose or the likelihood of foreclosure.
If the NPV test ultimately churns out a “negative” result, meaning the lender will make more money by denying the modification, the homeowner won’t get a Making Home Affordable modification unless the lender agrees to take a loss.
“Even though the administration is promoting loan modifications, they’re still operating from the premise that ‘we don’t want you to make loan modifications that aren’t going to make more money than a foreclosure,’” Cecala said. “This is very different from what community groups see as the (program’s) purpose.”

Mortgage rates held steady for the week ended Thursday, with 30-year, fixed-rate mortgages averaging 5.04 percent, according to Freddie Mac.

Last year at this time, 30-year, fixed-rate mortgages averaged 6.09 percent.

The averge for 15-year, fixed-rate mortgages was 4.46 percent — down slightly from last week, when it averaged 4.47 percent — the lowest it had been since Freddie Mac (NYSE:FRE) started tracking it in 1991.

A year ago, 15-year, fixed-rate mortgages averaged 5.77 percent.

One-year, adjustable-rate mortgages averaged 4.52 percent this week. That’s down from 4.58 percent last week but up from last year at this time, when it was 5.03 percent.

Last week, the Mortgage Bankers Association reported that mortgage applications jumped 12.8 percent during the week of Sept. 18 to the strongest pace since late May, boosted by refinancing activity.

By Shonda Novak
AMERICAN-STATESMAN STAFF
Wednesday, September 23, 2009

Central Texas foreclosure postings for the Oct. 6 auction hit their highest level since 2001, and the numbers could go higher still, experts say.

Foreclosure Listing Service Inc. said 1,481 properties were posted in Travis, Williamson, Hays and Bastrop counties, 72 percent higher than for the October 2008 auction.

Postings were up 79 percent in Travis County, 66 percent in Williamson, 80 percent in Hays and 39 percent in Bastrop.

Through October, nearly 11,600 properties in Central Texas — most of them homes — have been posted for foreclosure, 58 percent higher than in the same period of 2008, according to Foreclosure Listing Service, an Addison company that tracks foreclosure postings in several Texas cities.

In February, George Roddy Sr., the company’s president, said he thought foreclosures had peaked in Central Texas, although at high levels, but noted that future job losses were a big unknown that could change his prediction.

Since then, Austin’s job market has weakened, with unemployment at 7.2 percent last month and the annual job loss rate hitting a six-year high of 0.9 percent.

“Every time we think we’ve hit the plateau, it seems to spike a little bit higher a few months later,” Bonnie Brown, the company’s vice president, said Tuesday.

Brown said the numbers are expected to remain elevated for some time.


The main reason: Through September, loans for homes posted for foreclosure in Central Texas were made, on average, in 2005, she said. Potentially troubled loans made since then, especially in 2006 and 2007, before the housing markets slowed, have yet to reach the foreclosure stage, Brown said.

In addition, various loan-modification programs designed to assist financially stressed homeowners so they can keep their homes are not helping everyone, said Hugh Parrish, a veteran Austin real estate broker at Parrish & Associates.

“Many people have applied for modifications, and some have been successful,” Parrish said. “Many others could not be salvaged” because the homeowners did not have enough income to cover even reduced monthly payments.

“We are at a point in this process that these denials ultimately result in foreclosure,” he said.

Also contributing to the spike in Central Texas are repeat postings. Some lenders carry postings for several months, even as they try to work out loan revisions with the borrower. The repeat postings protect the lender’s right to seize the property if the negotiations don’t succeed.

But even when factoring out postings filed in previous months, Central Texas still has 285 more postings this October than last, a 50 percent gain and still a significant increase, Brown said.

Brown said that despite the elevated numbers, Central Texas hasn’t been anywhere “near as impacted” as other parts of the country.

“I talked to a gentleman today from the Detroit area, and unemployment in his hometown is at 20 percent,” Brown said. ‘We’re very lucky.”

NEW YORK (TheStreet) — Bank mortgage profits surged remarkably once the Obama administration’s housing plan was implemented, according to a report on Thursday that put some hard numbers behind what was already widely known. Each new mortgage loan generated $1,088 in profit during the first quarter, according to the Mortgage Bankers Association, about 7.4 times as those originated in the previous period. The main driver for the climb was the federal plan unveiled late in the first quarter, on Feb. 18, which aimed to allow homeowners to refinance into less costly mortgages and spur new buyers into the market. Mortgage profits likely improved even more during the second quarter, since the plan was more widely available and banks had hired more staff to handle the surge in consumer demand.

“It is clear the refinance boom in the first quarter of 2009 contributed greatly to an increase in overall production volumes, allowing production operating expenses per loan to finally drop,” said Marina Walsh, who oversees industry analysis at the MBA.

The net cost for a bank to originate a mortgage dropped by 26% to $1,725 per loan, according to the MBA survey. Operating costs fell as well. The lower costs combined with a surge in production volumes resulted in 85% of the firms surveyed reporting pre-tax profits, vs. 53% in the fourth quarter of 2008.

The huge margin expansion was evident in the results of Bank of America (BAC Quote), Wells Fargo (WFC Quote), JPMorgan Chase (JPM Quote) and Citigroup (C Quote), whose results have all improved sharply in the past two quarters.