The Obama administration plans to ride herd on mortgage modifications

Now that it's finally obvious to the Obama administration that the banks are dragging their feet on loan modifications, the White House is appointing officials to monitor the actions of the largest mortgage servicing companies on a daily basis. The administration also announced that it's requiring mortgage companies to develop and report plans to increase the number of completed modifications, and that it wouldn't make incentive payments to mortgage servicers that don't convert trial modifications into permanent ones.

Even though more than 650,000 borrowers have applied under Obama's Homes Affordable Modification Program and obtained trial modifications, few have actually received completed, permanent modifications. No one knows how many modifications have been completed because the administration refuses to release any data until December. But some mortgage executives expect only about 25% to 35% of those who apply to get them.

Borrowers continue to complain that they are asked for the same paperwork multiple times and wait months for an answer. While they wait and pay the modified amount agreed to with their bank as part of their trial modification, their mortgage payments continue to build in arrears. If they don't get the permanent modification, they quickly end up in foreclosure.

The key calculation that kills most modifications is the net present value (NPV) test , which is required for all loans being considered for a modification. It applies whether a borrower has a Fannie Mae or non-Fannie Mae mortgage. Servicers must use the base NPV model or the servicer's customized NPV model to perform this test. The model assesses the borrower's financial position as well as his loan information to determine eligibility for the modification program and calculates the NPV outcome (positive or negative, and the amount) for a given modification. In addition, a property valuation must be obtained to put into the base NPV model.

Deal or No Deal?

This NPV test determines whether the investor will get a better outcome with a modification or with a foreclosure. In other words, whether or not a person ultimately gets a modification is based solely on what nets the investor the most money -- a modification or a foreclosure. Even if a homeowner meets all the eligibility requirements, when the NPV test shows that the investor makes more money with a foreclosure, the loan will be foreclosed.

So with the NPV test as the key determining factor, the deck is stacked against the borrower. And to add insult to injury, banks are allowed to customize their NPV models to their own loan portfolios, even changing the discount rates used. Of course, you can expect banks to skew the model in their favor, which likely means even fewer people will get modifications.

Note: This story was updated with additional details after the administration officially announced its actions on Nov. 30.

Lita Epstein has written more than 25 books including The 250 Questions You Should Ask to Avoid Foreclosures.

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