SIGTARP 12-003 June 18, 2012 

The Net Present Value Test’s Impact on the 

Home Affordable Modification Program 
Office of the special inspector general 

 For the Troubled Asset Re For the Troubled Asset Re For the Troubled Asset Relief Program lief Program lief Program 

1801 L Street, NW, 4th Floor 

Washington, D.C. 20220 

 

SIGTARP 12-003 June 18, 2012 

June 18, 2012 

MEMORANDUM FOR: The Honorable Timothy F. Geithner – Secretary of the Treasury 

FROM: Ms. Christy L. Romero – Special Inspector General 

 for the Troubled Asset Relief Program 

SUBJECT: The Net Present Value Test’s Impact on the Home Affordable 

Modification Program (SIGTARP 12-003) 

We are providing this report for your information and use. It discusses the Home Affordable 

Modification Program’s net present value test. 

The Office of the Special Inspector General for the Troubled Asset Relief Program conducted 

this audit (engagement code 019), under the authority of Public Law 110-343, as amended, 

which also incorporates the duties and responsibilities of inspectors general under the Inspector 

General Act of 1978, as amended. 

We considered comments from the Department of the Treasury when preparing the report. 

Treasury’s comments are addressed in the report, where applicable, and a copy of Treasury’s 

response is included in the Management Comments appendix. 

We appreciate the courtesies extended to our staff. For additional information on this report, 

please contact Mr. Kurt W. Hyde, Deputy Special Inspector General for Audit and Evaluation 

(Kurt.Hyde@treasury.gov / 202-622-4633), or Ms. Kimberley A. Caprio, Assistant Deputy 

Special Inspector General for Audit and Evaluation (Kim.Caprio@treasury.gov / 202-927-8978). 
The Net Present Value Test’s Impact on the 

Home Affordable Modification Program 

SIGTARP 12-003 June 18, 2012 

Table of Contents 

Introduction ................................................................................................................................................. 1

Background ................................................................................................................................................. 4

The Discretion Treasury Gave to Servicers To Add a Risk Premium to the Discount Rate 

Reduced the Number of Homeowners Who Get Help in HAMP, According to SIGTARP’s 

Sample................................................................................................................................................... 7

Servicers in SIGTARP’s Sample Erred Inputting Homeowner Information in the NPV Test and 

Did Not Maintain Sufficient Documentation of the NPV Inputs ....................................................... 10

Servicers in SIGTARP’s Sample Communicated Poorly to Homeowners on the Denial of a 

HAMP Modification ........................................................................................................................... 12

Treasury Must Ensure Servicers Appropriately Apply the NPV Test To Assess Homeowners for 

HAMP ................................................................................................................................................. 13

Freddie Mac’s Review of HAMP Servicers ..................................................................................... 13

Treasury’s Oversight of Servicers’ Performance and Compliance, and Freddie Mac as the 

HAMP Compliance Agent ............................................................................................................ 13

Conclusions ............................................................................................................................................... 16

Recommendations ..................................................................................................................................... 20

Management Comments and SIGTARP’s Response ................................................................................ 21

Appendix A ‒ Scope and Methodology .................................................................................................... 22

Limitations on Data .......................................................................................................................... 24

Use of Computer-Processed Data .................................................................................................... 24

Internal Controls ............................................................................................................................... 25

Prior Coverage .................................................................................................................................. 25

Appendix B – The Home Affordable Modification Program’s Net Present Value Model ...................... 26

Appendix C ‒ Acronyms and Abbreviations ............................................................................................ 28

Appendix D ‒ Audit Team Members........................................................................................................ 29

Appendix E ‒ Management Comments .................................................................................................... 30
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 1

SIGTARP 12-003 June 18, 2012 

Introduction 

Faced with record numbers of foreclosures, Congress intended for the Troubled 

Asset Relief Program (“TARP”) to help families keep their homes. In 

February 2009, the U.S. Department of the Treasury (“Treasury”) announced 

TARP’s signature housing program, the Home Affordable Modification Program 

(“HAMP”), under which mortgages would be modified to a payment that is 

“affordable” and “sustainable.” Originally announced as a program that would 

help as many as 3 million to 4 million homeowners avoid foreclosure, as of 

March 2012, only 794,748 homeowners were in a permanent mortgage 

modification, approximately half of which are funded by TARP.1 According to 

testimony by Phyllis Caldwell, Treasury’s former Chief of the Homeownership 

Preservation Office (“HPO”), Treasury designed HAMP on four core principles: 

affordability, pay for success, a net present value (“NPV”) test, and help for 

unemployed borrowers.2 This report addresses the NPV test. 

The NPV test is the gateway through which an otherwise eligible homeowner gets 

help under HAMP. A mortgage servicer3 first determines a homeowner’s 

eligibility based on whether the homeowner is in default or at risk of imminent 

default, and whether the home is an owner-occupied, single-family, one- to fourunit property with a maximum unpaid principal balance of $729,750 (for one 

unit).4 The mortgage servicer must take several steps5 to lower the borrower’s 

monthly mortgage payment to 31% of the borrower’s monthly gross income. If a 

homeowner meets these eligibility criteria, the decision of whether a homeowner 

must be approved for HAMP rests on the results of the NPV test. Based on 

Treasury data as of March 2012, approximately 5% of 3.2 million homeowners 

denied for HAMP were denied based on the NPV test. This represents 160,870 

homeowners6

 who did not get help from HAMP. 

A key to understanding the NPV test is to know that it estimates whether it is in 

the best interests of the investor to modify a mortgage under HAMP. Servicers 

 

1

 The rest are funded by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan 

Mortgage Corporation (“Freddie Mac”). 

2

 Throughout this report, the terms “homeowner” and “borrower” are used interchangeably. 

3

 A mortgage servicer collects payments from the borrower and administers the loan. The servicer may be the lender or 

may be a specialized company under contract with the lender or the investor who owns the loan. 

4

 In March 2012, Treasury changed the name of HAMP to HAMP “Tier 1” and announced HAMP “Tier 2” effective 

June 1, 2012. The described criteria apply to the original HAMP. 

5

 The steps may include adding accrued interest due and late fees to the principal of the mortgage, reducing the interest 

rate, extending the term of the mortgage, and forbearing principal. For a more complete explanation of the NPV model 

and test, see Appendix B.

6

 This number includes private mortgages as well as Fannie Mae and Freddie Mac mortgages. 
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 2

SIGTARP 12-003 June 18, 2012 

enter 44 inputs7 (39 of which are specific to the NPV decision) into the NPV test.8 

The NPV test compares the expected cash flow from a modified loan with the 

expected cash flow from the same loan with no modification to determine which 

option is likely to be more valuable to the investor. If the NPV test estimates that 

modifying a mortgage will result in more revenue for the investor than not 

modifying the mortgage (described as a positive NPV result), the servicer must 

offer a HAMP mortgage modification to the homeowner.

9

 If the NPV test 

produces a negative result, a servicer has the option of modifying the mortgage 

under HAMP if the investor consents. 

Because the NPV test is a linchpin in an otherwise eligible homeowner’s HAMP 

application, Treasury guidelines require that servicers maintain documentation on 

their NPV inputs. If a servicer turns down a homeowner for HAMP, within 

10 business days it must send a letter to the homeowner explaining the reason for 

denial and describing other foreclosure alternatives. If the NPV test was the 

reason for the denial, the servicer must include 33 specific inputs that were used 

in its NPV test.10 Homeowners can request that the servicer rerun the NPV test if 

they believe one of the inputs is incorrect. The Dodd-Frank Wall Street Reform 

and Consumer Protection Act (“the Dodd-Frank Act”) required that Treasury 

make a web-based NPV calculator available to the public, which Treasury did on 

May 23, 2011, at www.CheckMyNPV.com. Homeowners can enter into the 

calculator the NPV inputs listed in their denial letter or substitute those with other 

inputs. 

Senator Jeff Merkley and eight other senators requested that the Office of the 

Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”) 

review whether servicers are correctly applying NPV to determine which 

homeowners qualify for HAMP.11 SIGTARP began a review to assess the issues 

 

7

 The NPV model uses three types of inputs: user inputs such as borrower and loan information; servicer-defined inputs 

such as risk premium, modification fees, and mortgage insurance partial payment amount; and the terms of the 

proposed HAMP modification. 

8

 Treasury has given servicers discretion to adjust the value used for three of the variables: (1) modification fees such as 

notary or property valuation fees; (2) mortgage insurance; and (3) the risk premium. The NPV test also contains 

12 assumptions, which are estimates or predictions about various mortgage characteristics that are factored into the 

NPV calculations. Treasury sets these assumptions based on Fannie Mae’s, Freddie Mac’s, and the Federal Housing 

Finance Agency’s analysis of mortgage data, including, for example, the probability a homeowner will default using 

standard redefault rates; home price projections (based on 110 local housing markets); and the time and costs 

associated with a foreclosure. 

9

 The scenario under which the mortgage is not modified assumes the borrower either becomes current on the mortgage 

payments without a modification or the borrower goes into foreclosure. 

10 Inputs as specified in the Making Home Affordable Program Handbook for Servicers of Non-GSE Mortgages include 

information such as gross income and the co-borrower’s credit score. 

11 The other senators were Richard Durbin, Jack Reed, Herb Kohl, Sherrod Brown, Russell Feingold, Sheldon 

Whitehouse, Mark Begich, and Maria Cantwell. 
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 3

SIGTARP 12-003 June 18, 2012 

surrounding the NPV test that have posed challenges to HAMP’s success, as well 

as the following objectives: 

 whether the servicers correctly applied the NPV test under the program; 

 the extent to which Treasury ensured that servicers appropriately applied the 

NPV test per HAMP guidelines when they assessed homeowners for program 

eligibility; and 

 the procedures servicers followed to communicate to homeowners the reasons 

they were denied HAMP mortgage modifications, as well as to identify the 

full range of loss mitigation options then available to those homeowners. 

In conducting this audit, SIGTARP gathered information from Treasury and its 

financial agent, the Federal Home Loan Mortgage Corporation (“Freddie Mac”), 

in its role as compliance agent for HAMP. SIGTARP also examined the 

application of the NPV test by three of the largest servicers participating in 

HAMP: Wells Fargo Bank, NA (“Wells Fargo”); GMAC Mortgage, LLC 

(“GMAC Mortgage”); and Ocwen Loan Servicing, LLC (“Ocwen”). From these 

servicers, SIGTARP judgmentally selected 149 homeowner applications to 

determine the impact that the NPV test had on whether these homeowners 

qualified for HAMP. SIGTARP also asked those three servicers and four 

additional servicers ‒ Bank of America, NA (“Bank of America”), CCO 

Mortgage, JPMorgan Chase Bank, NA (“JPMorgan”), and Saxon Mortgage 

Services, Inc. (“Saxon”) ‒ for their rationale or analysis for using the risk

premium. SIGTARP conducted the audit from March 2010 through May 2012, 

and in accordance with generally accepted government auditing standards as 

prescribed by the Comptroller General of the United States. For a discussion of 

the audit’s scope and methodology, see Appendix A. 
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 4

SIGTARP 12-003 June 18, 2012 

Background 

Three TARP oversight bodies ‒ the Congressional Oversight Panel (“COP”), the 

Government Accountability Office (“GAO”), and SIGTARP ‒ previously 

reported on problems or concerns over the NPV test. This report involves some 

of the same issues and concerns raised, based in part on SIGTARP’s sample 

testing. 

In October 2009, COP reported evidence of eligible borrowers being denied 

HAMP modifications incorrectly, misinterpretations of program guidelines, and 

difficulties encountered by borrowers and housing counselors in understanding 

the NPV models, as well as the reasons that HAMP applications were being 

denied. COP examined Treasury’s NPV model and noted that it was highly 

sensitive to small changes. COP reported that Treasury lets servicers override the 

default discount rate set by Freddie Mac and add a risk premium up to 250 basis 

points (2.5%). COP reported that the discount rate impacts the present value of 

expected cash flows. COP found that only a one basis point change in the risk 

premium is necessary to change the outcome of the NPV test from NPV positive 

to NPV negative. COP called on Treasury to provide greater transparency by 

releasing its NPV model and stated that requiring servicers to give borrowers 

specific reasons for denials “could help alleviate [lack of transparency].” 

In March 2010, SIGTARP reported that Treasury’s many changes to the HAMP 

NPV model from March 2009 through November 2009 posed challenges to 

servicers. Treasury changed or clarified the NPV test eight times in 2009. Some 

of these changes included updating key parameters in the test, such as the 

discount rate, the cure rate, and foreclosure costs, and adding a home price decline 

protection incentive payment to the model.12 Changes caused problems for the 

servicers throughout the process. Servicers told SIGTARP that they encountered 

problems accessing the NPV test early in the process and getting documentation 

from Treasury concerning the model, and that earlier models had errors and 

inconsistencies. In addition, servicers complained to SIGTARP that there was a 

lack of Treasury guidance and there was confusion regarding multiple changes to 

the model. One servicer told SIGTARP that changing the model made it 

particularly difficult to manage version control over the model. Another servicer 

told SIGTARP that there was a short time to comply with significant changes to 

the model, and servicers were not notified of changes to the model until after they 

were implemented. 

 

12 The discount rate is the current Freddie Mac’s Primary Mortgage Market Survey rate for 30-year fixed-rate conforming 

loans. The cure rate is the percentage of delinquent mortgages that become current because the borrowers remit all of the 

missed payments or pay off the mortgage in full. Foreclosure costs include pre-foreclosure sales, third-party sales, and other 

costs associated with foreclosure. Home price decline protection incentive payments are additional incentives for 

modifications of loans on properties located in areas where home prices have recently declined and where investors are 

concerned that prices will continue to decline. 
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 5

SIGTARP 12-003 June 18, 2012 

In April 2010, COP again reported on problems and concerns regarding the NPV 

test. COP applauded Treasury’s efforts to test its new NPV model, but stated that 

because Treasury had still not publicly released the model for the benefit of 

borrowers and counselors, Treasury had not made meaningful progress in 

addressing concerns about the secrecy of the NPV model. COP also reported that, 

although Treasury had made significant progress on establishing guidelines for 

written communications to homeowners regarding the reasons for a HAMP 

denial, it was unclear whether borrowers were receiving notices in a timely 

manner. COP stated that it is important for Treasury to monitor the activities of 

the program participants, audit them, and enforce program rules, guidelines, and 

requirements. 

In June 2010, GAO reported that 15 of the 20 largest servicers were not running 

the NPV test in compliance with HAMP guidelines. GAO reported, “This lack of 

compliance likely resulted in differences in how borrowers were evaluated, and 

could have resulted in the inequitable treatment of similarly situated borrowers.” 

Because servicers linked the NPV model to their own systems, GAO found that 

values for inputs such as property values and credit scores were erroneously 

updated during the rerunning of the NPV model. These errors were so severe that 

Treasury required the servicers to fix the in-house models, and determined that 

until they did so, the servicers could not deny a HAMP modification based on the 

NPV test. GAO found that half of the servicers it sampled reported at least a 

20% error rate for income calculations. GAO reported, “According to Treasury, 

the number of borrowers who were denied because of a servicer’s NPV errors 

could range from a handful to thousands, depending on the size of the servicer 

and the extent of the error.” GAO also found that servicers’ error rates for 

calculating borrower income were well above a servicer’s own established error 

thresholds (typically 3% to 5%). GAO reported, “Without accurate income 

calculations, similarly situated borrowers applying for HAMP may be inequitably 

evaluated for the program and may be inappropriately deemed eligible or 

ineligible for the program.” 

In addition to errors in inputs that servicers were using in the NPV test, GAO also 

reported concerns, similar to COP’s reported concerns, surrounding the risk 

premium. According to GAO, Treasury allowed some differences in how 

servicers evaluate borrowers for HAMP, which could result in inconsistent 

outcomes for borrowers. GAO was referring to Treasury allowing servicers to 

add up to a 2.5% risk premium to the Freddie Mac rate when inputting the 

discount rate to the NPV model. GAO explained, “The higher the risk premium a 

servicer chooses, the fewer the number of loans that are likely to pass the NPV 

model, because expected future cash flows would have less value.” GAO’s 

analysis determined that as of April 17, 2010, 11 servicers (out of more than 

100 servicers) used a risk premium, most of them the full 2.5%. 
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 6

SIGTARP 12-003 June 18, 2012 

The reported problems surrounding a lack of transparency in the NPV test and 

servicer errors led to Congressional action. Section 1482 of the Dodd-Frank Act 

required a publicly available web-based NPV calculator based on the HAMP 

NPV model to assist borrowers in understanding the NPV evaluation process 

under HAMP and in conducting an estimated NPV evaluation of their mortgage. 

Congressman Mike Quigley, who sponsored the amendment to the Dodd-Frank 

Act that required the NPV calculator, explained, “A homeowner’s fate hinges on 

the NPV score, so the American dream is literally at stake here.” 

In December 2010, COP reported that Treasury had come out with a new model 

and Dodd-Frank required its public release. COP noted that several factors could 

affect the success of the model, including the design and implementation of the 

model, and the accuracy of the data input by the servicers into the model. COP 

stated that Treasury still allowed servicers to add up to a 2.5% risk premium and 

added, “The number of loans that will qualify for a HAMP modification will vary 

depending on the risk premium a servicer uses in its NPV calculations.” 
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 7

SIGTARP 12-003 June 18, 2012 

The Discretion Treasury Gave to Servicers 

To Add a Risk Premium to the Discount Rate 

Reduced the Number of Homeowners Who Get 

Help in HAMP, According to SIGTARP’s Sample 

This section describes how the use of a risk premium results in fewer homeowners 

getting HAMP modifications. 

Despite warnings by COP and GAO that Treasury’s practice of allowing servicers 

to add a risk premium to Freddie Mac’s discount rate results in fewer 

homeowners being approved for HAMP, Treasury has allowed that practice to 

continue without questioning the servicer’s rationale for adding a risk premium as 

long as it does not exceed 2.5%. According to Treasury, the addition of the risk 

premium reflects an additional cost that investors may face in modifying and 

continuing to carry mortgages at risk of default. According to GAO’s June 2010 

report, only 11 out of more than 100 servicers participating in HAMP added a risk 

premium. SIGTARP decided to review these warnings by GAO and COP and 

found that although some servicers initially added a risk premium, only four 

continue to do so. It is unclear why this small number of servicers should be 

allowed to take an action that results in fewer HAMP modifications. 

With HAMP three years old and any risk in the program presumably known to 

servicers, Treasury should stop letting servicers add a risk premium to the 

discount rate used by Freddie Mac. SIGTARP surveyed seven servicers (GMAC 

Mortgage, Ocwen, Wells Fargo, Bank of America, CCO Mortgage, JPMorgan, 

and Saxon) to understand their rationale for use of the risk premium. Initially, 

only GMAC Mortgage did not add a risk premium.13 Six servicers added a risk 

premium – five added the maximum 2.5% (Bank of America, Saxon, 

Wells Fargo, JPMorgan, and Ocwen), and one, CCO Mortgage, added 0.005%. 

However, in late 2010 and early 2011, JPMorgan and Ocwen14 stopped adding 

any risk premium. JPMorgan explained to SIGTARP that initially it used the 

maximum risk premium because HAMP was new and had no performance results. 

JPMorgan told SIGTARP that it no longer used the risk premium because 

servicers and investors became more comfortable with HAMP over time and it 

wanted to align its practices with Fannie Mae and Freddie Mac, which do not use 

a risk premium. 

The rationale of one of HAMP’s three largest servicers, JPMorgan, may apply to 

the other servicers that continue to add a risk premium, which supports Treasury’s 

 

13 GMAC Mortgage told SIGTARP that it did not consider adding a risk premium and that it does not deny homeowners 

a HAMP modification solely based on the NPV result.

14 Ocwen did not provide to SIGTARP its rationale for its decisions on how it assigned a risk premium or why it 

eliminated the use of the risk premium. 
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 8

SIGTARP 12-003 June 18, 2012 

discontinuing any use of a risk premium. Bank of America, the largest HAMP 

servicer in terms of TARP incentives, told SIGTARP that it uses the highest risk 

premium allowed in part because investors wanted a higher discount rate, and 

rates that are too low could be costly to investors. Wells Fargo, the second-largest 

HAMP servicer, told SIGTARP that it uses the maximum risk premium because 

its “cost of capital” for its largest mortgage portfolio exceeds Treasury’s discount 

rate with the added 2.5% premium. 

In its sample, SIGTARP found that the discretion that Treasury gave to servicers 

to add a risk premium reduced the number of otherwise qualified homeowners 

that Treasury helped through HAMP. SIGTARP’s analysis of 51 judgmentally 

selected HAMP applications15 evaluated by Ocwen or Wells Fargo found that 

more than half (27) of the homeowners would have had a positive NPV result if 

the servicer had not used a risk premium. The following table demonstrates the 

impact of reducing and removing the risk premium. 

TABLE 1 

*Note: This column shows the number of NPV test results that changed from negative to 

positive when premium was reduced. 

Source: SIGTARP analysis of NPV negative mortgages from the two servicers that 

elected to use a risk premium. 

INCREMENTAL RISK PREMIUM CHANGE SUMMARY

Risk Premium Decrease 

*Number of NPV 

Decisions That 

Reversed 

From To 

2.5% 2.0% 7 

2.0% 1.5% 10 

1.5% 1.0% 5 

1.0% 0.5% 2 

0.5% 0.0% 3 

 Total 27 

SIGTARP’s analysis confirms that homeowners in the sample were denied a 

HAMP modification because of the servicers’ addition of a risk premium. 

A discount rate set by Freddie Mac is already used by more than 100 servicers in 

 

15 This sample of 51 loans is a subset of 149 loans that SIGTARP judgmentally selected from Ocwen, Wells Fargo, and 

GMAC Mortgage for NPV input testing. Of the 149 loans, only loans that were originally evaluated with a risk 

premium and returned a negative NPV test result were analyzed. The 149 loans were selected to represent a 

cross section of loans according to factors including geographic location, date the NPV test was run, and amount of 

unpaid principal balance. Results from a judgmental sample cannot be projected to the universe of data from which 

the sample was drawn. 
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 9

SIGTARP 12-003 June 18, 2012 

HAMP.16 Only four of the servicers in HAMP use the additional risk premium. 

If JPMorgan and Ocwen no longer believe there is a need to add a risk premium 

to the NPV test, it would not seem necessary for others. Treasury should remove 

this obstacle that prevents otherwise eligible homeowners from getting help from 

HAMP. 

 

16 The number of servicers participating in HAMP has changed over the course of the program. As of December 2011, 

there were 109 servicers participating in HAMP. 
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 10

SIGTARP 12-003 June 18, 2012 

Servicers in SIGTARP’s Sample Erred Inputting 

Homeowner Information in the NPV Test and 

Did Not Maintain Sufficient Documentation of the 

NPV Inputs 

This section describes how three of the largest servicers in HAMP performed in 

inputting NPV test information, according to SIGTARP’s sample. 

Any model will be only as good as its inputs. In addition to other Treasury 

oversight bodies, SIGTARP found in its sample that servicers made errors using

NPV inputs and did not properly maintain records of all NPV inputs17 during the 

period of our review. Good recordkeeping on NPV inputs is critical for oversight 

and to protect homeowners’ rights. Congress specifically intended that, through 

the web-based NPV calculator, homeowners have the right to ensure that their 

personal information was submitted correctly. A servicer’s failure to maintain the 

NPV inputs as required by Treasury guidance thwarts the intention of Congress, 

the ability for effective compliance and oversight, and the rights of homeowners 

who have been denied a HAMP modification due to the NPV test. 

Within SIGTARP’s judgmental sample of 149 applications that were reviewed for

HAMP modifications between 2009 and early 2011 by 3 of the largest servicers – 

Ocwen, Wells Fargo, and GMAC Mortgage – SIGTARP found that the servicers 

could provide both accurate inputs and documentation for only 2 of the 

HAMP applications. SIGTARP found instances in which servicers failed to 

comply with HAMP guidelines on maintaining records on NPV inputs. For 

19 HAMP applications, the servicer was not able to provide all of the inputs used 

to evaluate the homeowner for the NPV test. 

For another 19 HAMP applications, the servicer provided all inputs used to 

perform the NPV test, and provided documentation for all these inputs, but in 

some cases that documentation did not support the input used. For 

109 applications, the servicers either could not provide documentation to support 

various inputs, or provided inaccurate documentation for various inputs. For the 

149 denied HAMP applications, SIGTARP found that approximately 19% of the 

inputs either were entered incorrectly or could not be supported by the servicers’ 

records. Because of the servicers’ failure to maintain documentation of the NPV 

inputs, SIGTARP was unable to determine how many homeowners from its 

sample may have been wrongly denied a HAMP modification. 

 

17 SIGTARP found errors in its sample related to credit scores, principal forgiveness, dates of NPV tests, unpaid 

principal balance, amortization, principal and interest after modification, and the type of property valuation used.
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 11

SIGTARP 12-003 June 18, 2012 

One of the key inputs in SIGTARP’s sample where SIGTARP found errors or 

lack of documentation was the borrower’s gross income. Despite GAO’s 

June 2010 report about servicer errors in calculating gross income, SIGTARP 

found servicer errors. The extent to which servicers used incorrect data increased 

the risk of an improper decision to an unacceptable level. When servicers use 

erroneous information in the NPV test, homeowners may be denied a HAMP 

modification and may ultimately lose their homes. 
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 12

SIGTARP 12-003 June 18, 2012 

Servicers in SIGTARP’s Sample Communicated 

Poorly to Homeowners on the Denial of a HAMP 

Modification 

This section describes servicers’ performance in communicating with 

homeowners in SIGTARP’s sample. 

SIGTARP reviewed a sample of 26 denial letters sent by GMAC Mortgage, 

Ocwen, and Wells Fargo, and found that only 2 letters were issued in compliance 

with HAMP guidelines. HAMP guidelines require that servicers communicate a

denial to the homeowner within 10 business days after the decision. SIGTARP 

found that for 4 homeowners, Wells Fargo sent the denial letter to the homeowner 

between 32 and 147 business days (69 days on average) after Wells Fargo’s 

decision.18 Servicers’ failure to communicate denial of a HAMP modification to 

homeowners in a timely manner can have serious consequences because a delay 

may prevent homeowners from finding other foreclosure alternatives sooner. One 

homeowner was left in the dark when GMAC Mortgage failed to provide the 

homeowner with a reason for the denial. GMAC Mortgage later offered that 

homeowner a non-HAMP mortgage modification. 

Of the 12 homeowners sampled who were denied a HAMP modification due to a 

negative NPV result, 6 denial letters from 1 servicer failed to follow HAMP 

guidelines of listing certain NPV inputs. This failure to follow HAMP’s 

guidelines can have serious consequences because without these inputs 

homeowners cannot use the web-based NPV calculator, required by the DoddFrank Act, to challenge servicer errors that may have prevented their participation 

in HAMP. 

SIGTARP also found that the servicers failed to provide vital information on 

foreclosure prevention alternatives to homeowners in 18 of the 26 cases 

SIGTARP reviewed. Although 17 of the 18 letters from servicers told the 

homeowner that there may be other loss mitigation options available or that the 

mortgage was being reviewed for other loss mitigation solutions, the servicer did 

not give the homeowner any information on those options. In the 18th letter, the 

servicer did not tell the homeowner that there were other foreclosure alternatives. 

Treasury told SIGTARP that according to a sample Freddie Mac conducted in 

December 2011 of four large servicers – Bank of America, Wells Fargo, 

JPMorgan, and CitiMortgage ‒ Treasury found that those servicers had made 

improvements to denial letters. 

 

18 SIGTARP excluded two loans from timeliness testing. One was excluded because of the borrower’s bankruptcy 

proceeding. The other was excluded because, according to the servicer, Treasury was not allowing the servicer to 

deny modifications because of possible NPV test errors. 
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 13

SIGTARP 12-003 June 18, 2012 

Treasury Must Ensure Servicers Appropriately 

Apply the NPV Test To Assess Homeowners 

for HAMP 

Freddie Mac’s Review of HAMP Servicers 

Treasury contracts with Freddie Mac as its financial agent to conduct 

examinations and review servicers’ compliance with HAMP’s guidelines. 

Treasury has obligated approximately $228 million to retain Freddie Mac as the 

compliance agent for all HAMP servicers except Fannie Mae and Freddie Mac, 

and has paid Freddie Mac approximately $152 million as of March 31, 2012. 

Treasury’s former HPO Chief, Phyllis Caldwell, testified before COP in 

October 2010, “...Freddie Mac, Treasury’s compliance agent, conducts periodic 

audits of servicers’ implementation of the [NPV] model.” 

In addition, Freddie Mac monitors servicers for compliance with program 

guidelines through a number of reviews, including the second look process. 

According to Freddie Mac, in second look reviews, Freddie Mac examines the 

reason why a borrower was denied a HAMP modification and determines whether 

it agrees, disagrees, or is unable to determine how the servicer made the decision. 

Freddie Mac told SIGTARP that it examines a sample of at least 100 loans from 

each servicer in the second look process. 

For those in the sample turned down for HAMP because of the NPV test, 

Freddie Mac requests from the servicer all loan documentation and a list of the

NPV inputs the servicer used to run the test. Freddie Mac told SIGTARP that it 

examines the supporting documentation, determines what it believes the correct 

inputs to be, and reevaluates the loan using the NPV test. 

Treasury’s Oversight of Servicers’ Performance and Compliance, 

and Freddie Mac as the HAMP Compliance Agent 

Treasury is ultimately responsible for ensuring that servicers comply with HAMP 

guidelines. However, SIGTARP’s findings of servicer errors with the NPV test 

and failure to comply with HAMP guidelines in SIGTARP’s sample of HAMP 

applications through the beginning of 2011, and the more recent June 2011 poor 

assessment results, raise serious concerns about the effectiveness of Treasury’s 

oversight. Treasury is responsible for overseeing and monitoring Freddie Mac’s 

compliance activities. Treasury said it approves the design of Freddie Mac’s

compliance program; reviews the detailed results of the servicer reviews; and 

engages in additional oversight of a servicer if the servicer is significantly lagging 

in its efforts to correct identified issues. 

Treasury also monitors servicer progress with its Making Home Affordable

Compliance Committee meetings. According to Treasury, Freddie Mac briefs the 
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 14

SIGTARP 12-003 June 18, 2012 

committee on the status of the servicers in correcting issues identified during

Freddie Mac’s reviews and significant issues identified as part of NPV test 

reviews. SIGTARP reviewed committee minutes from September 2009 through 

March 2012 and found the minutes usually included a list of participants and a 

few bullet points. The committee’s charter states that Treasury “will also be 

responsible for capturing the notes of the meeting with special emphasis on the 

rationale behind any decisions ... made ...” Furthermore, the charter states that 

differing points of view should be documented in instances where there is a lack 

of consensus on issues discussed by the committee. 

However, given the lack of detail in the minutes, SIGTARP could not find 

evidence that the requirements of the committee’s charter were fulfilled. At the 

meetings, Freddie Mac presents details of its reviews of servicers, including 

results of second look reviews. Treasury told SIGTARP that it determines the 

appropriate course of action if there are significant delays or issues with a 

servicer’s remediation efforts. However, Treasury was unable to provide 

documentation confirming its oversight of servicers. Treasury did not provide 

SIGTARP documentation of actions that Treasury took as a result of Freddie 

Mac’s review. Treasury failed to document its oversight, stating that some of its 

oversight is conducted in such a way that there would be no formal 

documentation. Accordingly, SIGTARP was unable to verify Treasury’s role in 

the oversight of servicers or Freddie Mac. 

SIGTARP and COP have called for transparency of servicer performance. In 

March 2010, SIGTARP recommended that Treasury set performance benchmarks 

and publicly report on them to measure over time the implementation and success 

of HAMP. In April 2010, COP also recommended that Treasury release 

performance metrics, the results by servicer, and appropriate, meaningful 

sanctions or procedures to address noncompliance. 

However, despite these calls for accountability, Treasury did not publicly release 

information on Freddie Mac’s review of servicers until June 2011, more than 

2 years after HAMP started, and then released information only on the reviews of 

the 10 largest servicers.19 Treasury reported that 4 of the 10 largest servicers 

needed substantial improvement and six needed moderate improvement. In 

findings similar to those from GAO and SIGTARP, Treasury found that all 10 of 

the largest HAMP servicers used erroneous gross income amounts when 

evaluating borrowers for HAMP, with gross income calculation errors that ranged 

from 6% to 33%. 

Treasury’s first published assessment of the servicers raises concerns about 

Treasury’s compliance and remediation efforts. In June 2011, for the first quarter 

of 2011, 3 of the 10 largest HAMP servicers ranked poorly on the second look 

 

19 Treasury defined the 10 largest servicers as the 10 largest servicers based on HAMP activity volume. 
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 15

SIGTARP 12-003 June 18, 2012 

metric. That is, borrowers who should have received a permanent mortgage 

modification were wrongly denied. Four servicers had an unacceptably high 

number of cases where, in the second look process, Freddie Mac was unable to 

determine, based on the documentation provided, how the servicer reached the 

decision not to offer a permanent modification. Treasury withheld incentives 

from three servicers, but later released the funds. It is unclear why Treasury 

allowed large servicers to not follow HAMP guidelines without significant lasting 

consequences. 

Greater transparency over HAMP servicers’ failure to follow program guidelines 

since the June 2011 servicer assessments has led to some improvements from 

servicers. For example, seven servicers still need moderate improvement 

according to Treasury’s most recent assessment published in March 2012, which 

reported results for the fourth quarter of 2011. According to this most recent 

servicer assessment, as of the fourth quarter of 2011, some servicers are showing 

signs of improvement, but three servicers still have gross income error rates,

ranging from 6% to 10% of Freddie Mac’s sample, above Treasury’s established 

benchmark of 5% and well above those servicers’ internal benchmarks as reported 

by GAO as often set at 3% to 5%.20 Gross income is a crucial input in the NPV 

test. Treasury’s failure to establish benchmarks and publicly report on them 

earlier represents a lost opportunity to make these improvements earlier in 

servicer compliance. 

Treasury’s oversight since June 2011 appears to be focused on using the results of 

Freddie Mac’s review of servicers to rate the servicer and determining whether to 

temporarily withhold incentives. The most Treasury has done has been to 

withhold TARP funds from servicers temporarily for one to three quarters. 

Despite finding (in the June 2011 assessment) that all of the 10 largest servicers 

required either moderate or substantial improvement more than two years after 

HAMP started, Treasury has never permanently withheld any TARP payments or 

clawed back any TARP funds paid to servicers for servicers’ noncompliance with 

HAMP guidelines. 

 

20 GAO-10-634, “Troubled Asset Relief Program: Further Actions Needed to Fully and Equitably Implement Foreclosure 

Mitigation Programs,” June 24, 2010, p. 21. 
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 16

SIGTARP 12-003 June 18, 2012 

Conclusions 

The Troubled Asset Relief Program’s (“TARP”) signature program, the Home 

Affordable Modification Program (“HAMP”), was designed around four core 

principles, one of which was a net present value test (“NPV test”) that estimates 

whether a mortgage modification is in the best interest of the investor. The NPV

test is the gateway through which an otherwise eligible homeowner gets into 

HAMP. More than 160,000 HAMP-eligible homeowners have been turned down 

for a HAMP mortgage modification by their mortgage servicer based on the 

results of the NPV test. 

In 2009 and 2010, three TARP oversight bodies – the Office of the Special 

Inspector General for the Troubled Asset Relief Program (“SIGTARP”), the

Government Accountability Office (“GAO”), and the Congressional Oversight 

Panel (“COP”) – reported several problems with the NPV test. These problems 

included servicers failing to follow HAMP guidelines, servicers making errors in 

implementing Treasury’s NPV model, servicers inputting the wrong data, such as 

a borrower’s income, into the test, and concerns about Treasury’s monitoring of 

its compliance agent for HAMP, the Federal Home Loan Mortgage Corporation

(“Freddie Mac”). GAO reported that half of the servicers it sampled had a 

20% error rate in listing borrowers’ income. COP characterized problems with 

the NPV test as evidence of eligible borrowers incorrectly being denied HAMP 

modifications. GAO similarly reported that “this lack of compliance likely 

resulted in differences in how borrowers were evaluated, and could have resulted 

in the inequitable treatment of similarly situated borrowers.” 

SIGTARP’s most recent analysis from its sample identified concerns with the 

NPV test that may stand as barriers to homeowners getting much-needed help 

from HAMP. One concern can be easily fixed, though others require greater 

compliance and enforcement by Treasury: 

 Treasury’s practice of protecting investors by allowing them to add a “risk 

premium” to the NPV test calculation: SIGTARP found in its sample that the 

discretion that Treasury gave to servicers to override the baseline discount rate 

in the NPV test by adding a risk premium (of up to 2.5%) reduces the number 

of otherwise qualified homeowners Treasury helps through HAMP. 

According to Treasury, the addition of the risk premium reflects an additional 

cost that investors may face in modifying and continuing to carry mortgages at

risk of default. Only 4 servicers add a risk premium, down from 11 in 2010. 

More than 100 servicers do not add a risk premium. In a SIGTARP analysis 

of a sample of 51 denied HAMP applications, SIGTARP found that if the 

servicer had not used a risk premium, more than half (27) of the homeowners 

in SIGTARP’s sample would have tested positive in the NPV test (which 

would require the servicer to offer a HAMP modification). 
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 17

SIGTARP 12-003 June 18, 2012 

The fact that more than 100 servicers do not find it necessary to add a risk 

premium suggests that the four servicers that do can put an end to this 

practice, which protects the investors at the expense of homeowners. Of the 

three largest HAMP servicers, only Bank of America, NA (“Bank of 

America”) and Wells Fargo Bank, NA (“Wells Fargo”) use a risk premium, 

both choosing to use the maximum 2.5%. Bank of America justified its risk 

premium to SIGTARP by saying that investors wanted a higher discount rate. 

The third-largest servicer, JPMorgan Chase Bank, NA (“JPMorgan”), told 

SIGTARP that it initially used the maximum risk premium because HAMP 

was new and had no performance results, but discontinued it because servicers 

and investors became more comfortable with HAMP over time and it wanted 

to align its practices with the Federal National Mortgage Association (“Fannie 

Mae”) and Freddie Mac, which do not use a risk premium. There is a simple 

fix for Treasury to remove this obstacle to homeowners getting into HAMP – 

tell servicers that risk premiums are no longer allowed. 

 Errors Inputting Homeowner Information and Failure To Maintain 

Documentation in SIGTARP’s Sample: Any model will be only as good as its 

inputs. SIGTARP found in its sample that servicers made errors using 

NPV inputs and did not properly maintain records of all NPV inputs during 

the period of our review. Within SIGTARP’s judgmental sample of 149 

HAMP applications, SIGTARP found that the servicers could provide both 

accurate inputs and documentation for only two HAMP applications.21 

SIGTARP found that servicers failed to comply with HAMP guidelines on 

maintaining records on NPV inputs, which is crucial for compliance and to 

protect homeowners’ rights to challenge servicer error. For 19 denied HAMP 

applicants, the servicer was not able to provide all of the inputs used in the 

NPV test. In some instances where there was documentation, it did not 

support the NPV inputs the servicer used. For 149 denied HAMP 

applications, SIGTARP found that approximately 19% of the inputs were 

either entered incorrectly or could not be supported by the servicers’ records. 

Because of the servicers’ failure to maintain documentation of the NPV 

inputs, SIGTARP was unable to determine how many homeowners from its 

sample may have been wrongly denied a HAMP modification. 

 Errors in Calculating Homeowner Gross Income and in Other Areas in 

SIGTARP’s Sample: In 2010, GAO found that servicers’ error rates for 

calculating gross income were well above the servicers’ own established error 

rate thresholds, which were typically 3% to 5%. In 2010 and 2011, SIGTARP 

also found servicer errors or lack of documentation in calculating the 

homeowner’s gross income, which is a key input in the NPV test. SIGTARP 

also found errors in its sample related to credit scores, principal forgiveness, 

 

21 SIGTARP’s sample consisted of 149 HAMP applications reviewed by 3 of the 10 largest servicers: Ocwen, Wells 

Fargo, and GMAC Mortgage. 
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 18

SIGTARP 12-003 June 18, 2012 

dates of NPV tests, unpaid principal balance, amortization, principal and 

interest after modification, and the type of property valuation used. The 

extent to which servicers use incorrect data increases the risk of an improper 

decision to an unacceptable level. When servicers use erroneous information 

in the NPV test, homeowners may pay the price by being denied help under 

HAMP and ultimately may lose their homes. 

 Poor Communication with Homeowners on Denial of HAMP Modifications in 

SIGTARP’s Sample: In its sample, SIGTARP also found that servicers had 

poor communication with homeowners on the denial of a HAMP modification 

due to the NPV test. SIGTARP reviewed a sample of 26 denial letters sent by 

GMAC Mortgage, LLC (“GMAC Mortgage”), Ocwen Loan Servicing, LLC 

(“Ocwen”), and Wells Fargo, and found that all but 2 of the letters failed to 

comply with at least 1 requirement of HAMP guidelines. Wells Fargo sent 

denial letters to 4 homeowners between 32 and 147 business days (69 days on 

average) after its decision, well past the 10-day requirement. Six denial letters 

failed to list certain NPV inputs, which has serious consequences because 

without the inputs, homeowners cannot use the web-based NPV calculator 

required by Congress and specifically designed to allow homeowners to 

challenge their servicer about errors. Treasury told SIGTARP that it has 

recently made improvements in that area, according to a December 2011 

sample of four large servicers. 

SIGTARP’s findings of servicer errors with the NPV test and failure to comply 

with HAMP guidelines in its sample raise serious questions about the 

effectiveness of Treasury’s oversight of servicers. In March 2010, SIGTARP 

recommended that Treasury set performance benchmarks and publicly report on 

them to measure HAMP implementation and success. Despite this call for 

accountability on the part of servicers, Treasury did not release information on 

reviews of the 10 largest servicers until June 2011, more than 2 years after HAMP 

was launched. The results showed that four needed substantial improvement and 

the other six needed moderate improvement. 

Treasury also monitors servicer progress through its Making Home Affordable 

Compliance Committee meetings. According to Treasury, Freddie Mac briefs the 

committee on the status of the servicers in correcting issues. However, Treasury 

was unable to provide documentation of determination of appropriate action on 

significant delays or issues with a servicer’s remediation efforts.

There were also issues with seven servicers in Freddie Mac’s second look 

reviews. For a sample of at least 100 loans per servicer, Freddie Mac examines 

the reason why a borrower was denied a HAMP modification and determines 

whether it agrees. In June 2011, Treasury published first quarter 2011 data 

showing that 3 of the 10 largest HAMP servicers ranked poorly in the second look 

reviews, meaning that homeowners were wrongly denied modifications, and 

4 servicers had an unacceptable number of cases where Freddie Mac was unable
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 19

SIGTARP 12-003 June 18, 2012 

to determine how the servicer reached the decision not to offer a permanent 

modification. Treasury also found that all 10 of the largest servicers used 

erroneous gross income amounts when evaluating borrowers for HAMP, with 

6% error rates to 33% error rates. 

Despite the poor servicer assessments announced in June 2011, more than two 

years into HAMP, Treasury has never permanently withheld any TARP payments

or clawed back any TARP payments to servicers. Greater transparency over 

HAMP servicers since the June 2011 servicer assessments has led to some 

improvements, although more transparency is needed. For example, according to 

the most recent assessments, three servicers still have gross income error rates of 

6% to 10%, exceeding both Treasury’s benchmark of 5% and the servicers’ own 

benchmarks. Gross income is a crucial input in the NPV test. Treasury’s failure 

to establish benchmarks and publicly report on them prior to June 2011 represents 

a lost opportunity to make improvements earlier in servicer compliance. Greater 

improvement in servicers’ compliance is a key to homeowners getting help 

through HAMP. Treasury must be more rigorous in its compliance and 

enforcement (including permanently withholding TARP payments) against 

servicers that fail to follow HAMP guidelines. 
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 20

SIGTARP 12-003 June 18, 2012 

Recommendations 

1. Treasury should stop allowing servicers to add a risk premium to 

Freddie Mac’s discount rate in HAMP’s net present value test. 

2. Treasury should ensure that servicers use accurate information when 

evaluating net present value test results for homeowners applying to HAMP 

and should ensure that servicers maintain documentation of all net present 

value test inputs. To the extent that a servicer does not follow Treasury’s 

guidelines on input accuracy and documentation maintenance, Treasury 

should permanently withhold incentives from that servicer. 

3. Treasury should require servicers to improve their communication with 

homeowners regarding denial of a HAMP modification so that homeowners 

can move forward with other foreclosure alternatives in a timely and fully 

informed manner. To the extent that a servicer does not follow Treasury’s 

guidelines on these communications, Treasury should permanently withhold 

incentives from that servicer. 

4. Treasury should ensure that more detail is captured by the Making Home 

Affordable Compliance Committee meeting minutes regarding the substance 

of discussions related to compliance efforts on servicers in HAMP. Treasury 

should make sure that minutes clearly outline the specific problems 

encountered by servicers, remedial options discussed, and any requisite 

actions taken to remedy the situation. 
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 21

SIGTARP 12-003 June 18, 2012 

Management Comments and 

SIGTARP’s Response 

Treasury provided an official written response to this report in a letter dated 

June 15, 2012, which is reproduced in full in Appendix E. Treasury disagreed 

with the findings in our report. Treasury responded that SIGTARP’s sample of 

149 HAMP applications was too small, from too few servicers, and not recent 

enough to be representative of current operations. Treasury stated that use of a 

risk premium is traditional in expected cash flow modeling. Treasury said it 

would discuss the recommendations with SIGTARP. 

SIGTARP’s audit was conducted in accordance with Generally Accepted 

Government Auditing Standards (“GAGAS”). GAGAS 7.63 provides that “when 

sampling is used, the method of selection that is appropriate will depend on the 

audit objectives” and that “a targeted selection may be effective if the auditors 

have isolated certain risk factors or other criteria to target the selection.” As 

required by GAGAS 7.63, SIGTARP made a targeted selection after isolating 

certain risk factors and other criteria. As stated in the report, SIGTARP selected 

its judgmental sample from 3 of the 10 largest servicers, based on servicing 

portfolio size, SIGTARP Hotline complaints, amount of eligible incentives 

available to each servicer through HAMP, and other factors. SIGTARP validated 

more than 5,000 inputs that were used for the loans to determine the potential 

impact on the NPV decision. SIGTARP’s report is not based solely on the 

targeted sample, but on all information gathered. Sampling serves to validate 

information and conclusions reached by SIGTARP during interviews and other 

research as clearly set forth in detail in Appendix A. This includes that SIGTARP 

compared its targeted sample results to information found in Treasury’s service

assessments, including one from March 2012, that found that some servicers are 

showing signs of improvement, but seven servicers still need moderate 

improvement in their compliance and that three servicers continue to have 

unacceptable gross income error rates. As such, SIGTARP recommended that to 

the extent a servicer does not comply with Treasury’s guidelines, Treasury should 

permanently withhold incentives from that servicer. 

As to the risk premium, 96% of the servicers do not add a risk premium. Only 

four servicers add a risk premium. The third-largest servicer, JPMorgan, 

discontinued the practice because investors became comfortable with HAMP. 

SIGTARP recommended that, based on this and other data, and the potential that 

this risk premium could result in negative NPV scores, Treasury should 

discontinue allowing a risk premium. 
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 22

SIGTARP 12-003 June 18, 2012 

Appendix A ‒ Scope and Methodology

We performed this audit under the authority of Public Law 110-343, as amended, which also incorporates

the duties and responsibilities of inspectors general under the Inspector General Act of 1978, as amended. 

The Office of the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”) initiated 

this audit in response to a letter dated March 10, 2010, from Senator Jeff Merkley and eight other senators.22 

Our audit objectives were to determine: 

 whether the mortgage servicers correctly applied the net present value (“NPV”) test23 under the 

Home Affordable Modification Program (“HAMP”); 

 the extent to which the U.S. Department of the Treasury (“Treasury”) ensured that servicers 

appropriately applied the NPV test per HAMP guidelines when they assessed homeowners for 

program eligibility; and 

 the procedures servicers followed to communicate to homeowners the reasons they were denied 

HAMP mortgage modifications, as well as to identify the full range of loss mitigation options 

then available to those homeowners. 

We conducted our audit work at Treasury’s Office of Financial Stability in Washington, D.C., Fannie Mae 

headquarters in Washington, D.C., Freddie Mac headquarters in McLean, Virginia, and the offices of three 

mortgage servicers: Ocwen, in West Palm Beach, Florida; Wells Fargo in Des Moines, Iowa; and GMAC 

Mortgage in Waterloo, Iowa. The scope of this audit covered both privately owned mortgages and Fannie

Mae- and Freddie Mac-owned mortgages that were serviced by HAMP servicers. 

To determine the extent to which servicers correctly applied the NPV test, we assessed the accuracy of the 

servicers’ decisions to grant or deny HAMP mortgage modifications by verifying the accuracy of 

information servicers entered into the NPV model24 (“NPV inputs”) and re-performed the NPV test, but we 

did not validate the NPV model directly. We judgmentally selected the sample of three servicers based on 

servicing portfolio size; amount of eligible incentives available to each servicer through HAMP, SIGTARP 

Hotline complaints, and other factors.25 We then judgmentally sampled a total of 50 mortgages from each 

servicer based on a cross section of loans according to factors including geographic location, date the NPV 

test was run, and amount of unpaid principal balance. In addition, we reviewed eight Congressional 

constituent complaints. Our sample totaled 158 mortgages that were evaluated for HAMP by these servicers 

between August 4, 2009, and January 13, 2011. We tested 149 of the 158 sampled mortgages because 

necessary documentation was not available for 5, 3 of the constituents referred to us were not eligible under 

the program, and the servicers never evaluated the HAMP eligibility of 1 constituent’s mortgage (but the 

constituent later received a proprietary mortgage modification). 

 

22 The other senators were Richard Durbin, Jack Reed, Herb Kohl, Sherrod Brown, Russell Feingold, Sheldon 

Whitehouse, Mark Begich, and Maria Cantwell. 

23 A full explanation of the NPV test and its importance in determining homeowner eligibility for HAMP mortgage 

modifications is included in the Introduction of this report, on p. 1. 

24 For more information on the NPV model and NPV test, see Appendix B – The Home Affordable Modification

Program’s Net Present Value Model. 

25 Results from a judgmental sample cannot be projected to the universe of data from which the sample was drawn.
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 23

SIGTARP 12-003 June 18, 2012 

We examined supporting documentation for the selected NPV inputs for all mortgages tested to ensure that 

the inputs used by the servicers in the NPV test were accurate. We validated 36 of the 44 inputs for each 

mortgage tested, resulting in a total of 5,364 inputs tested. These inputs were judgmentally selected based 

on the potential impact that they would have on the NPV decision. The remaining inputs such as “HAMP 

servicer number” and “remaining term” were not validated because they have a lesser impact on the NPV 

decision. For the gross income NPV input, we recalculated each borrower's monthly gross income based on 

supporting documentation in accordance with program guidance and servicers’ own policies and procedures 

for calculating gross income. We also consulted with Freddie Mac for guidance on the gross income 

calculations. 

To analyze how a reduction in the discount risk rate premium from 2.5% to 0% (in increments of 0.5%) 

would affect each borrower’s NPV result, we submitted for testing all private loans in our sample using 

inputs based on servicer documentation to Treasury’s online NPV test, holding constant all inputs other than 

the risk premium. No GMAC Mortgage-serviced mortgages were retested because GMAC Mortgage does 

not add a risk premium. From the original sample of 50 Ocwen mortgages, 8 were excluded from testing 

because necessary documentation was missing from the servicer’s files, 2 were excluded because they were 

owned by Fannie Mae or Freddie Mac, 4 failed to return an NPV value, and 1 loan returned a positive NPV 

value, leaving 35 Ocwen mortgages that were tested. In addition to the original sample of 50 mortgages 

serviced by Wells Fargo, all constituent mortgages we reviewed were also serviced by Wells Fargo. From 

the 58 mortgages we sampled, 18 were excluded from testing because necessary documentation was missing

from the servicer’s files, 13 were excluded because they were owned by Fannie Mae or Freddie Mac, 

5 failed to return an NPV value, and 6 returned a positive NPV value, leaving 16 Wells Fargo mortgages

that were tested. In total we tested all 51 loans that returned a negative NPV result – 35 from Ocwen and 

16 from Wells Fargo – and all 51 were analyzed at each risk premium increment. We also surveyed seven

servicers for their rationale for choosing a risk premium, as well as their analysis to support their decision. 

The seven servicers were GMAC Mortgage, Ocwen, Wells Fargo, Bank of America, CCO Mortgage, 

JPMorgan, and Saxon Mortgage Services, Inc. (“Saxon”). 

To gain an understanding of the NPV model and its proper application, we interviewed officials from 

Treasury, the mortgage servicers, industry groups, Fannie Mae, Freddie Mac, the Federal Deposit Insurance 

Corporation, and the Federal Housing Finance Agency, and we received a demonstration of Treasury’s base 

model from Fannie Mae. We interviewed Fannie Mae on its role in the creation of the NPV model and the

NPV model’s mechanics. We also collected Treasury’s HAMP guidance, policies and procedures from the 

three sampled servicers, the Emergency Economic Stabilization Act of 2008, the Helping Families Save 

Their Homes Act of 2009, and relevant Treasury white papers providing additional guidance to servicers on 

the NPV test. We also obtained from Treasury feedback that it had received from servicers and industry 

groups on the NPV model, version 4.0. 

To determine the extent to which Treasury ensures that servicers are appropriately applying the NPV test 

per HAMP guidelines when assessing borrower program eligibility, we conducted interviews with Treasury

officials, Fannie Mae, Freddie Mac, and three servicers. We also reviewed Treasury’s policies and 

procedures as well as the audit program that Freddie Mac uses to assess servicer compliance and associated 

workpapers, servicer participation agreements, Treasury guidance on HAMP, Treasury’s financial agent 

oversight policy, and sections of the Financial Agency Agreement between Treasury and Freddie Mac that

were pertinent to the NPV test. In addition, we reviewed communications sent by Freddie Mac to servicers 

notifying them of issues that Freddie Mac had identified, as well as Treasury’s Making Home Affordable
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 24

SIGTARP 12-003 June 18, 2012 

Compliance Committee meeting minutes for October 2009 to March 2012, showing what actions, if any, 

have been taken to address these issues. 

To determine the procedures used by servicers to communicate to borrowers the reasons they were denied

HAMP mortgage modifications and their full range of loss mitigation options, we selected half of the 

original sample of 50 loans from each servicer for further detailed testing. In total, we tested 26 mortgages 

after excluding loans owned by Fannie Mae and Freddie Mac and those loans that were evaluated for 

HAMP by the sampled servicers before January 1, 2010, when Treasury issued guidance on denial 

communications. Our scope for this objective focused on whether servicer denial communications to 

borrowers complied with Treasury’s guidance. In addition, we reviewed Treasury’s guidance, discussed 

with servicers their policies and procedures for handling HAMP denials, and reviewed servicers’ mortgage 

documentation supporting foreclosure alternatives. 

We conducted this performance audit from March 2010 through May 2012, and in accordance with 

generally accepted government auditing standards. Those standards require that we plan and perform the 

audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and 

conclusions based on our audit objectives. We believe that the evidence obtained provides reasonable basis 

for our findings and conclusions based on our audit objectives. 

Limitations on Data 

We obtained servicer populations of mortgages that were evaluated for HAMP, and the NPV test date and 

final NPV decision for each mortgage. We also obtained data provided by Fannie Mae to report on the 

status of modifications and the NPV inputs used. While we validated the accuracy of the NPV inputs in our 

sample using the steps described in the scope and methodology outlined above, we could not verify the 

completeness of the data provided by the servicers or Fannie Mae because we did not have direct access to 

extract the data from their systems. In addition, we could not independently confirm the total number of 

mortgages evaluated for HAMP by each servicer. 

Use of Computer-Processed Data 

To perform this audit, we used data provided by Fannie Mae and the servicers on the status of modifications 

and the NPV inputs used. While we could not validate the completeness of the data (see explanation in the 

“Limitations on Data” section), we verified the accuracy of the data in our sample by obtaining related 

mortgage documentation. In addition, the NPV model has edits to prevent servicers from submitting data 

outside the range limit of the model. Those edits provide some assurance of the reasonableness of the data, 

but do not attest to the accuracy of the data submitted to the model. Accordingly, we did not rely on the 

model’s edits. 
THE NET PRESENT VALUE TEST’S IMPACT ON THE HOME AFFORDABLE MODIFICATION PROGRAM 25

SIGTARP 12-003 June 18, 2012 

Internal Controls 

We reviewed internal controls over the accuracy of data used in the NPV test by comparing servicers’ inputs 

to mortgage-related source documentation. We also reviewed Treasury and the sampled servicers’ controls 

over communications to borrowers by assessing Treasury guidelines and testing servicer compliance with

those guidelines, specifically on timeliness, reason for denial, description of foreclosure alternatives and, if 

the loan was denied for a negative NPV, did each letter include a list of inputs and a statement that the 

borrower may request the date the NPV calculation was completed and values used for those inputs. 

Prior Coverage 

Government Accountability Office, Report No. 11-288, “Troubled Asset Relief Program: Treasury 

Continues to Face Implementation Challenges and Data Weaknesses in Its Making Home 

Affordable Program,” March 17, 2011 

Congressional Oversight Panel, “Examining the Consequences of Mortgage Irregularities for 

Financial Stability and Foreclosure Mitigation,” November 16, 2010 

Government Accountability Office, Report No. 10-634, “Troubled Asset Relief Program: Further 

Actions Needed to Fully and Equitably Implement Foreclosure Mitigation Programs,” 

June 24, 2010 

Congressional Oversight Panel, “Evaluating Progress on TARP Foreclosure Mitigation Programs,” 

April 14, 2010 

SIGTARP, Report No. 10-005, “Factors Affecting Implementation of the Home Affordable 

Modification Program,” March 25, 2010 

Congressional Oversight Panel, “Taking Stock: What Has the Troubled Asset Relief Program 

Achieved?,” December 9, 2009 

Government Accountability Office, Report No. 10-301, “Office of Financial Stability (Troubled 

Asset Relief Program) Fiscal Year 2009 Financial Statements,” December 9, 2009 

Congressional Oversight Panel, “An Assessment of Foreclosure Mitigation Efforts after Six 

Months,” October 9, 2009 

Government Accountability Office, Report No. 10-16, “Troubled Asset Relief Program: One Year 

Later, Actions Are Needed to Address Remaining Transparency and Accountability Challenges,” 

October 8, 2009 

Government Accountability Office, Report No. 09-837, “Troubled Asset Relief Program: Treasury 

Actions Needed to Make the Home Affordable Modification Program More Transparent and 

Accountable,” July 23, 2009 

Congressional Oversight Panel, “Foreclosure Crisis: Working Toward a Solution,” March 6, 2009 
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Appendix B – The Home Affordable Modification Program’s 

Net Present Value Model 

On March 4, 2009, Treasury issued guidelines that introduced its NPV model and explained how the model

should be used to evaluate borrowers requesting a modification to their mortgage under HAMP. The model 

includes both a net present value test component (“NPV test”) and a tool that checks the reasonableness of 

the terms the servicer used when applying the HAMP modification waterfall (“waterfall check”). 

For privately owned mortgages, the NPV test determines whether a servicer participating in HAMP is 

required to offer the borrower a HAMP mortgage modification. The model compares the net present value

of cash flows expected from a modified mortgage to the net present value of cash flows expected if the

mortgage is not modified. If the value of the cash flows is greater with a mortgage modification than

without, the servicer is required to offer a HAMP modification to the borrower. Otherwise, a HAMP 

modification is optional. 

For mortgages owned or guaranteed by Fannie Mae and Freddie Mac, servicers are required to offer a trial 

modification under HAMP when the difference in the cash flows is positive as well as when the difference 

in net present values of cash flows is negative – as long as the difference is negative by less than $5,000.26

 

In other words, even if the NPV test indicates that a modified mortgage would cost Fannie Mae or Freddie 

Mac up to $5,000 more than foreclosure, the servicer must still offer the modification. 

The NPV model also has a waterfall check. HAMP servicers are required to modify certain aspects of a 

borrower’s mortgage in the order outlined below, called a waterfall, until the borrower’s debt-to-income 

ratio reaches 31% without going below 31%.27 The reasonableness of the data used by the servicer to apply 

the waterfall is assessed by the model, although the model’s guidance states that the servicer is responsible 

for verifying a borrower’s program eligibility and modification terms. The waterfall steps are: 

 First, the servicer calculates the current debt-to-income ratio based on the current mortgage payment and 

gross monthly income. 

 Second, the servicer capitalizes any unpaid interest and fees28 (that is, the servicer adds them to the 

outstanding principal balance). 

 Third, the servicer reduces the interest rate in incremental steps to as low as 2%. 

 Fourth, if the 31% threshold has still not been reached, the servicer extends the term of the mortgage to a 

maximum of 40 years from the modification date. 

If the four steps do not reduce the borrower’s debt-to-income ratio to the 31% threshold, the servicer may 

allow a borrower to defer, or forbear, principal payments, subject to certain limits. The forbearance amount 

 

26 According to Fannie Mae, the mandatory mortgage modification threshold of $5,000 in negative cash flows went into 

effect on December 1, 2009. 

27 Under Treasury guidelines, there is no restriction on reducing the debt-to-income ratio below 31%, but the portion of 

the reduction below 31% will not be reimbursed by Treasury. The 31% debt-to-income ratio level was chosen 

because Treasury considers it to be the standard across the industry for an affordable and sustainable modification. 

This standard is also a Federal Housing Administration underwriting target. 

28 Late fees are not capitalized. 
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SIGTARP 12-003 June 18, 2012 

is not interest bearing and results in a lump-sum payment due upon the earliest of the sale date of the 

property, the payoff date of the interest-bearing mortgage balance, or the maturity date of the mortgage. 

Servicers are not required to forgive principal under HAMP. However, servicers may forgive principal in 

order to lower the borrower’s monthly payment to achieve the debt-to-income ratio goal of 31% on a standalone basis or before any of the other HAMP modification steps described above. 
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Appendix C ‒ Acronyms and Abbreviations 

Acronym or 

Abbreviation Definition 

Bank of America Bank of America, NA 

CCO Mortgage CCO Mortgage, a division of RBS Citizens, NA 

COP Congressional Oversight Panel 

Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer Protection Act 

Fannie Mae Federal National Mortgage Association 

Freddie Mac Federal Home Loan Mortgage Corporation 

GAO Government Accountability Office 

GMAC Mortgage GMAC Mortgage, LLC 

HAMP Home Affordable Modification Program 

HPO Homeownership Preservation Office 

JPMorgan JPMorgan Chase Bank, NA 

LLC Limited Liability Corporation 

NA National Association 

NPV Net present value 

Ocwen Ocwen Loan Servicing, LLC 

Saxon Saxon Mortgage Services, Inc. 

SIGTARP Office of the Special Inspector General for the Troubled Asset Relief Program 

TARP Troubled Asset Relief Program 

Treasury U.S. Department of the Treasury 

Wells Fargo Wells Fargo Bank, NA 
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Appendix D ‒ Audit Team Members 

This audit was conducted and the report was prepared under the direction of Kurt W. Hyde, Deputy Special 

Inspector General for Audit and Evaluation, and Kimberley A. Caprio, Assistant Deputy Special Inspector 

General for Audit and Evaluation, Office of the Special Inspector General for the Troubled Asset Relief 

Program. 

Staff members who conducted the audit and contributed to the report include Patrice Wilson, Lindsay 

Steward, Philip Mastandrea, Andrew Lopresti, Clayton Boyce, and Cynthia Broome. 
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Appendix E ‒ Management Comments 
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SIGTARP Hotline 

If you are aware of fraud, waste, abuse, mismanagement, or misrepresentations associated with the Troubled 

Asset Relief Program, please contact the SIGTARP Hotline. 

By UOnline FormU: Uwww.SIGTARP.govU By Phone: Call toll free: (877) SIG-2009 

By Fax: (202) 622-4559 

By Mail: Hotline: Office of the Special Inspector General

for the Troubled Asset Relief Program

1801 L Street., NW, 3rd Floor 

Washington, D.C. 20220

Press Inquiries 

If you have any inquiries, please contact our Press Office: 

Troy Gravitt 

Director of Communications 

Troy.Gravitt@treasury.gov

202-927-8940 

Legislative Affairs 

For Congressional inquiries, please contact our Legislative Affairs Office: 

Joseph Cwiklinski 

Director of Legislative Affairs 

Joseph.Cwiklinski@treasury.gov

202-927-9159 

Obtaining Copies of Testimony and Reports 

To obtain copies of testimony and reports, please log on to our website at Uwww.SIGTARP.govU.