Robert K.

Ramers
Top Gun Auditor
Tel: 415-730-4514 fax: 707-885-0500 email: topgunauditor@gmail.com


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A Conflict of Interest: How Loan Servicers Profit by Using the Net
Present Value Calculation to Deny Loan Modifications
By Robert K. Ramers
Who can use this information?
Have you been denied a loan modification, or had your property foreclosed and wondered why this
happened, since you felt that your lender would actually benefit more by giving you a modification or
allowing you to refinance your property at its fair market value?
Are you in litigation with your lender, and trying to get them to settle with you or provide a loan
modification to which you feel you are entitled and cannot understand why they are fighting so hard to
avoid this outcome?
If so, the information in this article may shed some light on these financial mysteries and explain the
apparently illogical behavior of your lender!
Who are the players and why is that important?
Before we even begin to discuss the Net Present Value issue (we will refer to it as the NPV from now
on), it is important to understand who is involved in your loan transaction, what their roles are and how
these roles might lead to a conflict of interest. In other words, who actually lent you the money, who is
the actual owner of your loan right now and is entitled to your mortgage payments, who is the party
collecting your monthly loan payments, and who will benefit or lose money in a loan modification,
foreclosure or short sale (we identify these parties and their responsibilities in our Chain of
Title/Securitization Analysis reports).
Original lender
The party named on your promissory note and deed of trust is the original lender. It might be a
mortgage company or a bank. It is very likely that this party did not use their own funds for your
transaction, but used investor funds that they got from a Trust set up to buy your promissory note and
receive your mortgage payments to provide tax free income to the bond holders of the trust..
It is likely that the original lender sold or transferred your promissory note to another party. This party
could have sold it to a third party, who then may have sold it to a Trust, which had raised money from
institutional investors such as pension funds and governmental agencies. This process is known as the
securitization of your loan, because your loan was used as collateral for securities (bonds) that were
sold to investors.
Current owner of your loan
If your loan was securitized, the owner of your loan are actually the investors in the Trust that is
holding your note and deed of trust as collateral. The trustee of the trust, usually a bank, is charged
with the responsibility to make sure that all of the assets ( including your promissory note) have been
put into the trust when they were supposed to have been, i.e., the closing date of the trust. The
Robert K. Ramers
Top Gun Auditor
Tel: 415-730-4514 fax: 707-885-0500 email: topgunauditor@gmail.com


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trustee is also responsible for making sure that all of the loan payments that are coming into the trust
are distributed to the investors based on the investments that they made, and that the financial
interests of the investors are protected.
It is important to note that it is only the actual current owner of your note (or an agent that they
appoint) has the authority under the Deed of Trust that you signed to negotiate a loan modification, to
assign your note to somebody else, to substitute trustees, or to foreclose on your property.
The Servicer of your loan
If your loan was securitized (or even if it wasnt), you are probably getting monthly statements from and
making payments to the servicer of your loan. This party is often a bank also, and you might think that
they are your lender. However, they are merely a debt collector. They were hired by the Trust or
other party that actually owns your loan to manage the Trusts portfolio of loans, to collect payments
negotiate loan modifications, manage foreclosures and short sales and report the status of the loans to
the trust and its investors
1
. These servicers are, of course, supposed to act in the best interests of their
clients, and here is where the plot thickens!
Servicers are paid handsomely for these services. Often they get from .025% to .05% of the loan balance
that they manage as a servicing fee. Many of these trusts have thousands of loans in them, and the
monthly payments from these loans can amount to millions of dollars. For example, a fee of 0.05% of
$300,000,000 is $150,000 a month! In many cases, the fees paid to servicers are HIGHER if they are
servicing a loan that is in default. This situation creates the first conflict of interest, since a servicer will
profit by dragging out a default situation to increase the fees that they earn.
This benefit for the servicers does not come without obligations. In many of the contracts between the
Trusts and the servicers that I have examined (they are called Pooling and Servicing Agreements), the
servicers are required to do the following in exchange for getting paid their servicing fees:
1. If the borrower does not make a monthly payment when due, the servicer must advance this
payment to the trust to maintain the cash flow to the investors.
2. If the servicer makes a modification to the original terms of the loan, and this modification
reduces the payments to the trust, the servicer must make up the difference. In some cases, the
only way that the servicer is allowed to modify the loan is if they purchase it back for the current
loan balance. In no cases is the servicer allowed to make a modification that would threaten the
tax free status of the trust.
So, you can see why a loan servicer might not want to offer you a loan modification and is motivated to
drag out the time you are in default as much as possible they make more money! They not only earn
higher fees by managing a defaulted loan, but they also avoid having to buy back your loan from the
trust or make up the difference in any reduced mortgage payments from a modification.

1
Information about securitized loans, including who owns the loan, the payment history, payments to the servicer,
responsibilities of the servicer and other information is available using the Bloomberg financial software and the
Securities and Exchange Commission database. We use these sources in our chain of title audits and NPV analysis.
Robert K. Ramers
Top Gun Auditor
Tel: 415-730-4514 fax: 707-885-0500 email: topgunauditor@gmail.com


Copyright 2013, Robert Ramers v3- September 2014

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But wait, you might say, dont the servicers have to keep making my payments to the trust if I do not
make them? Isnt this costing them a lot of money?
Yes, it is. We have specialized software that lets us see the amount of these servicer advances. We
have seen advances amounting to more than $200,000 on a single loan.
Now here is where the real conflict of interest comes in. In many cases, the only way that the servicer
can get reimbursed for the advances it has made to the trust, whether these advances are due to non-
payment by the homeowner or because of reduced payments due to a loan modification, is through
foreclosure of the property!
Furthermore, the servicer gets paid BEFORE any money goes to the investor, regardless of the sale price
of the property. This explains the apparently illogical situation where a servicer will foreclose on a
property at a huge loss, when on the surface a loan modification would have been better for both the
homeowner and the actual owner of the loan. The software that we use allows us to see the amount of
these losses, called the loss severity. In the more than 500 audits that we have done, we have
documented loss severities of 50% to over 70% on loans that have been foreclosed on by loan servicers.
In some cases, these losses have actually amounted to over 100% of the loan value, probably due to
legal expenses and other fees charged by the loan servicers to the Trust that owns the loan.
These facts explain the apparently illogical behavior of loan servicers. What they are doing is perfectly
logical in financial terms, since they make more money. However, both the homeowner and the actual
owner of your loan are being damaged.
How can the servicers get away with this, you might say? One of the tools that they use is the way that
they calculate the Net Present Value figure to justify their decision to foreclose on a property rather
than offering a loan modification.
What is the Net Present Value?
We will discuss this in more detail below, but here is a brief outline of how the Net Present Value is
calculated and used.
This calculation is used to compare different investment opportunities. To evaluate which investment
opportunity is more profitable, businesses first determine how much money they will have to invest and
how much money they expect to get back for each opportunity. However, cash investments are made
over a period of time and cash income is received over a period of time, and money that you get a year
from now is not worth as much as money that you get today, since you could invest the money that you
have today to make more money. Manually comparing a long string of cash outlays and income to see
which opportunity is more profitable would be difficult, but the NPV approach condenses all of these
numbers into a single figure. This figure can be calculated for different investment opportunities to see
which is the most profitable for the investor.
The NPV calculation is based on the fact that money NOW is more valuable than money LATER ON.
Why? Because you can invest the money that you have now at some interest rate to earn more money,
but you cannot invest money you get in the future until you receive it.
Robert K. Ramers
Top Gun Auditor
Tel: 415-730-4514 fax: 707-885-0500 email: topgunauditor@gmail.com


Copyright 2013, Robert Ramers v3- September 2014

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Example
Lets say you can earn 10% interest on your money. If so, getting $1,000 today should be the same to
you as getting $1,100 in one year, since you will earn $100 in interest in that year (10% X $1000 = $100,
plus your original $1,000 equals $1,100).
If you reverse this logic, you should be just as happy to get $1,100 in one year as you would be to get
$1,000 today, since all you could earn on your $1,000 is 10% for the next year.
By discounting the stream of cash outlays and income (using the interest rate you think you can earn on
your money) back to the present, you come up with a single number from each cash flow stream. You
can then compare these numbers to decide on the most profitable investment opportunity.
The Net Present Value in Modification and Foreclosures
This is how lenders use the net present value calculation to see if it would be more profitable for them
to foreclose on a property than to provide a loan modification.
First, they calculate how much money they would get if they foreclosed on a mortgage. They should
take into account the market value of the property and all of the costs of a foreclosure and sale of the
property, including real estate commissions, the time they will have to hold the property before they
can sell it and any other expenses related to the foreclosure. (You might see already how many
numbers can be manipulated in this calculation!) Consider this number investment opportunity A.
Then they calculate how much money they would get if they got a stream of payments from you under
various scenarios. These scenarios can involve extending the term of your loan to 40 years, lowering the
interest rate to 2% or reducing the principal amount owed. This calculation would be their investment
opportunity B. However, they do not just add up these payments under these scenarios, but they
DISCOUNT them using the interest rate they could earn on the money if they could have it today to
come up with the NPV of this investment opportunity.
In other words, they calculate the NPV of the cash from the modification and compare it with the NPV
from a foreclosure, and see which figure is bigger. If the NPV from a foreclosure is greater than the NPV
for a modification, they are justified in proceeding with the foreclosure because it will provide a greater
return to the owner of the loan.
However, with a mortgage, it is more complicated because:
1. Often it is not the actual investor who is making this calculation, but the loan servicer. The loan
servicer is motivated to come up with a figure that results in a decision that will benefit them
but not be in the best interests of the actual owner of the loan or the owner of the property.
2. In a foreclosure or modification situation, there are many assumptions that have to be made
about WHEN money will be received, what COSTS are involved in getting the money, and how
the money will be DIVIDED among the parties involved in the transaction.
These complications provide an opportunity for those doing the calculations to make the NPV numbers
come out to support the outcome that is most beneficial to them. Few homeowners (or attorneys for
Robert K. Ramers
Top Gun Auditor
Tel: 415-730-4514 fax: 707-885-0500 email: topgunauditor@gmail.com


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that matter) understand or challenge the calculations. Not understanding and challenging the NPV
calculation can result in losses to both the homeowner and the investor who owns the loan, providing a
financial benefit only to the loan servicer.
Why an accurate NPV calculation is critical
The NPV is used as one of the first barriers to see if you are eligible for a HAMP modification. Even if you
are not eligible for a HAMP modification for other reasons, the NPV calculation is often required to
determine if a denial of your modification complies with state laws that require that a loan modification
must be granted if it would yield a higher return to the lender than a foreclosure.
HAMP NPV issues
The Making Home Affordable Program Handbook for Servicers of Non-GSE Mortgages, version 4.3 as of
September 16, 2013 states the following about the NPV test and how it is used:

Robert K. Ramers
Top Gun Auditor
Tel: 415-730-4514 fax: 707-885-0500 email: topgunauditor@gmail.com


Copyright 2013, Robert Ramers v3- September 2014

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State law NPV issues
State laws vary as to whether or not NPV issues have been codified. In California, the law, as stated in
the California Homeowners Bill of Rights that became law in January of 2013, is clear that the servicer of
a loan is required to maximize the NPV for the investors (i.e., the party who actually owns your loan):
Robert K. Ramers
Top Gun Auditor
Tel: 415-730-4514 fax: 707-885-0500 email: topgunauditor@gmail.com


Copyright 2013, Robert Ramers v3- September 2014

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How liars figure
Unfortunately, to understand how the NPV calculation can be misused to profit loan servicers at the
expense of both homeowners and the actual owners of your promissory note (i.e., your current
lender), we have to dig a little deeper into the NPV formula and how it is calculated. The detailed
math used in the calculation is beyond the scope of this paper, but we will examine enough of what is
used in the formula to understand what is actually happening. (We use our specialized software to
calculate alternative NPVs based on what we will present below.)
The basic NPV formula is as follows:

Where

The Making Home Affordable formula is a little more complicated (from the Home Affordable
Modification Program Base Net Present Value (NPV) Model v5.02 Model Documentation Handbook):

Robert K. Ramers
Top Gun Auditor
Tel: 415-730-4514 fax: 707-885-0500 email: topgunauditor@gmail.com


Copyright 2013, Robert Ramers v3- September 2014

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The actual formula used in the case of a default to determine the NPV is as follows:
Robert K. Ramers
Top Gun Auditor
Tel: 415-730-4514 fax: 707-885-0500 email: topgunauditor@gmail.com


Copyright 2013, Robert Ramers v3- September 2014

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An NPV Calculation example
Dont worry about the details in the above formula. For purposes of understanding what it going on, we
only need to understand what is not included in the above calculations and who gets the money in both
the foreclosure and the modification scenarios. Lets use an example to explain what we mean.
EXAMPLE
Original loan amount: $750,000, at 7% interest for 30 years
(Lets say that the loan has been in default for some time, and the servicer has had to advance $50,000
to the trust that is claiming ownership of the loan)
Current market value of property: $575,000
Foreclosure/REO costs (using state averages, no lawsuit or delay): $30,000
Discount rate for NPV calculation (specified by HAMP): 4.0%
Possible loan modification: Interest rate lowered to 4%, term extended to 40 years, principal reduced
to $500,000.

Robert K. Ramers
Top Gun Auditor
Tel: 415-730-4514 fax: 707-885-0500 email: topgunauditor@gmail.com


Copyright 2013, Robert Ramers v3- September 2014

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The make believe numbers the fox in the chicken house
Remember, the person who is doing these calculations is the loan servicer, who has a vested interest in
making sure that they maximize their profits. In almost all of the cases that I have investigated, the
loan servicer ALWAYS makes more money from a foreclosure than from a loan modification! The
formulas are so complex, and there is so much discretion in the assumptions used in the formulas that
the party making the calculations can often manipulate the numbers to show whatever is in their best
interests, but do not reflect reality.
Net present value from foreclosure
If the property forecloses, lets simplify and assume that the net proceeds would just be the market
value of the property, $575,000, less the foreclosure costs of $30,000, or a net of $535,000. (The actual
number would be less if we take timing issues into consideration.)
Net present value from a modification:
If the loan were modified using the above assumptions, the NPV of the cash flows for the next 40 years
would be $499,991.

Based on these figures, it would make more sense to proceed with the foreclosure, right? The net
proceeds would be $35,000 more than through a loan modification on a NPV basis.

The real numbers
But wait a minute. The calculations above were done by the servicer, and the net proceeds do not go
to the actual owner of the loan. We need to make some adjustments to the money that the investor,
who owns your loan, actually gets and to consider other costs if the homeowner decides to litigate:
1. First, the servicer is going to deduct the $50,000 that they have advanced to the trust and any
past due fees for servicing the loan before paying anything to the owner of the loan. That
reduces the net proceeds to at least $485,000 in the foreclosure scenario. The past due
servicing fees and any expenses that they have incurred further reduce the funds paid to the
investor.
2. If the homeowner files a lawsuit, the servicer will incur legal costs that will be reimbursed before
any proceeds go to the investor. Lets say that these legal costs are $35,000. Even if the
servicer eventually wins the lawsuit and proceeds with the foreclosure, this may not happen for
up to a year, which will reduce the NPV of the sale proceeds. Also, the servicer will deduct all of
their costs from the proceeds. Lets assume that these events reduce the actual proceeds to
the investor in the foreclosure scenario to $450,000.

Now when we do the comparison, the loan modification alternative looks a lot more attractive to the
owner of the loan. If the loan is modified, the lender will receive an NPV amount of $499,991, but if
the servicer proceeds with a foreclosure, they will only receive $450,000
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. If these figures were used in
the HAMP NPV model, the servicer would be obligated to offer the loan modification. Even if HAMP was
not used, it is possible under state law that the servicer would be required to offer a modification, since
it would be in the best interests of both the homeowner and the owner of the loan. The only party that
benefits from the foreclosure is the loan servicer.


2
The actual formulas are more complex, and take into consideration the probability of a re-default and other
variables.
Robert K. Ramers
Top Gun Auditor
Tel: 415-730-4514 fax: 707-885-0500 email: topgunauditor@gmail.com


Copyright 2013, Robert Ramers v3- September 2014

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Conclusion Dont let the fox guard the
chicken coop!
I have rarely seen this type of analysis and challenge to the
calculations made by loan servicers when they deny a loan
modification. Also, I have not seen this challenge made in a lawsuit
against a loan servicer. The reason is probably because of the lack
of understanding of the Net Present Value calculation and the lack
of access to information about the agreements between the Trusts
that may own a loan and the servicers who are responsible for
managing the loan portfolio of the trusts. Challenging the Net
Present Value calculations made by the loan servicer and
understanding the potential for a conflict of interest on the part of
the loan servicer can help insure that homeowners are treated fairly
in their attempts to get a loan modification and save their homes.


Robert K. Ramers is a
Certified Fraud Examiner, a
Certified Fraud Examiner,
chain of title and Certified
Securitization Auditor. He
has conducted over 500
investigations on behalf of
homeowners. His prior
experience includes
positions as Financial Vice
President and CEO of
several corporations. He is
available to perform loan
modification/ NPV and
Securitization Analysis for
borrowers and attornies
and as an Expert Witness.
He can be contacted at
topgunauditor@gmail.com

ROBERT K. RAMERS