Can an extra $10 in disposable income determine the success or failure of a loan modification application?

Ask a banker, and it's "Of course not." Ask others, and you get a different answer.

Mortgage servicers all have different "sweet spots," or key targets for financial information such as disposable income, that determine whether an applicant qualifies, say some lawyers and industry experts who, for a fee, help borrowers get loan modifications. Too much disposable income, and the borrower does not qualify; too little, and he or she also misses the cut.

"Most homeowners are unaware that they can be denied for being off on their disposable income by just $10 from the lender's unique sweet spot," said Andy Firoved, the chief executive of Homeowner Toolbox, an Irvine, Calif., software company that sells a $99 product to homeowners called the Probability Meter, which offers tips and predicts the likelihood of a successful outcome.

Firoved, a former mortgage banker, has completed 2,000 tests of borrowers' loan-modification submissions to 75 servicers using his company's proprietary software. He found that certain financial variables such as disposable income, debt-to-income ratios, loan type and hardship were key determinants in whether a borrower got approved.

Taylor Woods, the president of Genpact Mortgage Services, a unit of Genpact, a New York business process outsourcer, said his company helps servicers create what he calls "the secret sauce" that can determine which customers are most likely to repay their loans.

Servicers have created "alternative types of modification plans," primarily to help them generate revenue from the government's loan-modification incentive program, he said. "A new valuation is required for a loan modification, and we look at the variables that go into that calculation and help [servicers] decide what the solutions are, combined with current income, expenses and payment capability," he said.

Such variables help servicers "make the best strategic decisions."

"People would like to know what the secret sauce is," he said. "We basically find the optimal outcome for each borrower, though it can be different if you're the investor, servicer or homeowner."

Because borrowers are inundating servicers with calls, Genpact is also offering a "self-service tool" that lets borrowers input financial information online or pull down data from a servicer.
Some mortgage servicers dispute the notion that any financial calculation is used beyond what is provided by the Obama administration's Home Affordable Modification Program. Under this plan servicers are encouraged to reduce monthly mortgage payments to a 31% debt-to-income ratio.

"There is no such thing as a sweet spot," said Tom Kelly, a spokesman for JPMorgan Chase & Co. "The Obama plan is the best choice for most borrowers, and it's a pretty straightforward formula."

But Michael Brauneis, the director of regulatory risk consulting at Protiviti, a Menlo Park, Calif., global business consulting and internal audit firm, said most servicers have designed their modification programs around net-present-value tests so that a borrower's disposable income may determine whether a modification is approved.

"There does turn out to be a 'sweet spot' in most cases in the intersection of borrower income, debt, value of the property etc.," he said. "If the borrower's monthly disposable income is too high, what happens in the model is that the likelihood of repayment goes up so [that] not offering a mod is a relatively more attractive option from a net-present-value perspective."
Borrowers with relatively high incomes compared to their housing debt — though not necessarily their total debt — might be below the housing debt-to-income ceiling necessary to be considered for a modification, he said.

Servicers participating in the Department of the Treasury's HAMP program have little discretion to change the parameters of net-present-value tests, and some servicers have expressed concern that they are being required to offer modifications "that don't make economic sense" or that they cannot offer modifications that might be more effective, Brauneis said.

At the same time, many servicers are offering their own customized modification programs, and with those, "seemingly small changes in qualification criteria can make a big difference in the number and types of borrowers who qualify," he said.

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