As a mortgage lender, it is important to be familiar with the concept of replacement cost. Essentially, a replacement cost is the amount needed to replace an asset at the same value — in the mortgage industry, this asset is typically a house.
Replacement costs are not a “one and done” sort of deal — they can change depending on the market value of the home. Replacing a home can definitely be a pricey process, so companies analyze the “net present value” or NPV of future cash inflows and outflows in order to make purchasing decisions and determine the replacement cost. As for how the NPV is used, a company will decide on a discount rate, which is an educated guess about the minimum rate of return on the investment. The cash inflows and outflows for the purchase are taken into account; if the net total is a positive number, it is a wise idea to make the purchase.
What Is a NPV Calculator and How Does it Work?
Calculating an NPV is not a quick or easy equation, so using an online tool that was designed expressly for this purpose can save mortgage lenders a lot of headaches. For example, the FDIC has made an online NPV calculator available to the public, based on the agency’s use of the tool during the resolution of IndyMac Federal Bank. Having a correct NPV calculation can help with evaluating the costs of a loan modification as opposed to a foreclosure. The FDIC has provided a link on its site to the calculator, which is in the Excel format. The user-friendly tool asks you to enter in the origination loan characteristics and the borrower’s updated income info, as well as variable terms like the current Freddie Mac Weekly Mortgage rate. The spreadsheet will then automatically calculate the current mortgage payment based on this info, as well as escrow based on the average amount of property tax by state, and the estimated months to foreclosure and costs, again based on state averages.
Will a Homeowner’s NPV Score Influence a Mortgage? You Bet it Will!
If homeowners want to get a loan modification on their mortgage, they will have to pass the NPV test. Mortgage originators will use the NPV test to decide if it’s more profitable to modify the loan and be willing to accept lower monthly payments from the homeowner, or keep the mortgage as is, possibly causing the homeowners to go into foreclosure. While the homeowner will probably be chomping at the bit to modify the mortgage terms so it is more affordable, a number of these modified loans end up going into foreclosure anyway. The NPV formula will include an estimate for the chances the mortgage will redefault — or end up going into foreclosure despite everyone’s best intentions. In addition to the projected redefault rate, the NPV calculations guess a number of other factors, including how many months are likely to pass by before a redefault, how likely the homeowner will catch up on payments if the loan is not modified, how much the home is currently worth and its worth in a year’s time, and how much it might get in a foreclosure sale using something called the REO discount. Interestingly, for the homeowners who are going through this, this variety of numbers and figures are secret and will not be disclosed to the people attempting to modify their mortgage.
How Property Data Can Help Mortgage Lenders Determine NPV and Replacement Cost
When determining these important pieces of data, mortgage lenders want to have the most accurate information that is available. Instead of using a run-of-the-mill NPV test, it is a great idea to use property data to determine an even more accurate replacement cost.
For example, DataTree’s Home Equity Suite of Services and Property and Ownership Verification features, which are available through the Mortgage Lending and Data Analytics platform, provide the accurate and up-to-date data that mortgage lenders can use to make these important calculations. For example, property ownership and encumbrance reports of the current owner, market analysis condition reports and alternative valuations can all help determine the current home equity of a property. In addition, mortgage lenders can use the data available from DataTree to verity the property and ownership information, find the current mortgage information, order a valuation on the property and much more. All of this data will help mortgage lenders determine an accurate replacement cost and NPV for a home, which in turn may allow more homeowners to modify their loans and avoid foreclosure. For more information on DataTree’s Mortgage Lending platform, visit our website.