Sacramento bankruptcy lawyers who file Chapter 7 and Chapter 13 bankruptcies on behalf of individuals will be glad to know that the Center for Responsible Lending has published a study that shows that it makes more sense for lenders to modify a distressed homeowner’s loan than to immediately foreclose on the individual’s property. The Center released a study on March 22 that researched whether investors who held a defaulting loan could retrieve more money through foreclosure or modification. The study used the net present value test (NPV), which is used by the federal loan modification program in addition to numerous private programs. The answer turned out to be (under most circumstances), whether the loan was securitized or not, that it made more sense to modify because the lender received more money in the long run.
The authors explained that when considering whether to modify a loan, a prudent investor must balance the cost of foreclosing with the costs of reducing a borrower’s monthly payment. The NPV test is a ready tool to calculate this ratio and the authors using the instrument were able to evaluate over 1,500 test cases. The authors were also able to include different circumstances such as original size of the loan, different property values, and well as the size of the reduction in monthly payments. According to the study then, if the end result of the test shows a lower re-default rate than the actual re-default rate, the value of modifying the loan is higher than what could be gotten through foreclosure. Therefore, under these conditions the lender should grant a loan modification rather than initiate foreclosure proceedings. The Center’s study calculated that most real-world circumstances should lead to a loan workout.
According to the study, a loan modification that discounts the loan by 10% would be profitable more than 86% of the time under existing self-cure numbers. Thus, the Center has concluded that NPV tests should begin to inspire a lender’s willingness to implement the loan modification process into its business model.
As a Sacramento Bankruptcy Attorney I am dedicated to ensure that my clients receive the best information available to assist them in determining what course of action works best for his or her financial situation. Whether Chapter 7, Chapter 13, or a Loan Modification rests in an individual’s best economic interest is, of course, determined by the special circumstances that are unique to every person. As a local practitioner I incorporate litigation as well as aggressive negotiations to get fair consideration and treatment for my client’s loan modification applications as well as equal and fair treatment from the court should they decide to file for bankruptcy.
If you or someone you know has been dealing with these sorts of circumstances recently, you should contact someone who has experience dealing with these issues in order to know what options may be available and therefore can begin to re-take control over the economic conditions that have significantly affected your living situation.