Maybe New NPV test on the Horizon to include write downs?????

[litehouse01]

Treasury Weighs New Test for Loan Modifications (Update1) Share Business ExchangeTwitterFacebook| Email | Print | A A A By Dawn Kopecki and Theo Francis Feb. 2 (Bloomberg) -- The U.S. Treasury Department is considering changes to its “net present value” test used to determine whether lenders can write off mortgage principal for borrowers seeking more affordable loan terms. The Obama administration’s main foreclosure prevention plan uses the standard to measure whether lenders and bond investors would collect more money during the life of the loan by foreclosing on the property or by lengthening repayment terms and reducing the amount of interest or principal owed. “We’re looking at the NPV model to see whether there should be some changes” that would lead to more principal writedowns, Seth Wheeler, a senior adviser leading Obama’s foreclosure prevention efforts at the Treasury, told bond investors and traders at the American Securitization Forum’s annual meeting held at a hotel in a Maryland suburb of Washington. “While no decisions have been made, no changes are imminent, we’re certainly taking a very, very serious look.” Obama’s Making Home Affordable Program, which encourages lenders to voluntarily modify loans “at imminent risk” of default, calculates the net present value of a modification based on the first mortgage. Some banks are beginning to use principal reduction to tackle so-called negative equity, where a borrower owes more than their home is worth. Negative equity, which leads some borrowers to walk away from their debt, has emerged in recent months as a leading cause of foreclosures, said Laurie Goodman, senior managing director at Amherst Securities Group LP. ‘Most Important Driver’ “Negative equity is the single most important driver of defaults,” Goodman said at the meeting. “Modifications can help, but right now the way they are structured, they can only help on the margins” because most are still are only lengthening repayment terms and reducing interest. Principal reductions are rare, Goodman said, citing data from the Office of the Comptroller of the Currency that showed Fannie Mae, government mortgage company Ginnie Mae and private investors didn’t allow principal writedowns on any of their loan modifications. Freddie Mac allowed writedowns on 1 percent of their amended mortgages. About 37 percent of the modifications held in portfolio and serviced by banks that owned both the first and second mortgage reduced at least some principal for borrowers, Goodman said. “So where the interests of the first, the second and the servicers are all in line, principal reductions seem to be the answer,” she said. “Portfolio loans have a substantially lower re-default rate than other loans.” Material Improvement Doug Potolsky, a senior vice president at JPMorgan Chase & Co.’s Chase home-loan unit, said the bank has been using principal reductions more frequently in recent months. As a result, he said, “we are seeing a material improvement in the re-default rates” on those loans. Negative equity is a “challenge,” especially when a borrower can’t afford their mortgage and the amount they owe exceeds 120 percent of the property’s market price, Wheeler said. He said few lenders have used the Treasury’s cash incentives that allow them to reduce as much as $1,000 of principal a year over each of the program’s five years, “which obviously doesn’t help nearly enough in some cases.” Wheeler said that “as we look and see at what servicers are doing, we’ll look to increase” those incentives for principal reductions. “And what form that encouragement takes is yet to be determined,” he said. To contact the reporters on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net; Theo Francis in Washington at tfrancis14@bloomberg.net. Last Updated: February 2, 2010 14:11 EST

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