08-02-2010, 10:54 AM
quote:
Still in the end, for the banks, the decision comes down to one simple but little known calculation that determines whether people get to stay in their homes.
Net present value, Kishner explains. "Net present value tells you whether the modification makes sense on behalf of the investor. In other words, the property if it were to be sold on the open market if it would net the investor more money than the modification.â€
So it comes down to simple math which makes more money for the investors: a foreclosure or a modified loan. The cost of foreclosure to the overall economy is not part of the equation.
Net present value as opposed to future present value. A modified loan that someone continues to make regular payments on has a higher FPV than a net present value. So really what it is is the setting of the bar so high that only those that would qualify for a loan in today's market can actually get a modification. If the FPV equations takes into account a failure rate of X, it may be correct to dump all loans so that X isnt spread across the balance sheet in 5-10-15 years. Look bad now when everyone else does, or look bad later.
So the gist is the modification program is bogus.