Secret Test Ensures Lenders Win on Loan Mods

by Alexandra Andrews and Emily Witt, ProPublica

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. 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 last Wednesday, 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.