Author(s): Steve Holden (Fannie Mae), Austin Kelly (FHFA), Douglas McManus (Freddie Mac), Therese Scharlemann (U.S. Department of the Treasury), Ryan Singer (FDIC), and John D. Worth (NCUA)
Abstract: The foreclosure crisis that began in 2008 triggered the need for new approaches to treat distressed mortgages. A key component of the Obama Administration’s Home Affordable Modification Program (HAMP) was the development of a standardized Net Present Value (NPV) model to identify troubled loans that were value-enhancing candidates for payment-reducing modifications. This paper discusses the development of the HAMP NPV model, its purpose, and some important constraints that dictated its structure and limitations. We describe the structure and the estimation of the model in detail. Furthermore, we describe the responsiveness of the model to key characteristics, such as loan to value and credit score and provide new evidence on the relationship between HAMP modification performance and key borrower and modification characteristics. The paper concludes with a discussion of model limitations and suggestions for further refinement of the model.