Close to half of modified mortgages facing rate increases are underwater, suggesting that hundreds of thousands of homeowners who were granted relief during the downturn may be at risk of default in the coming years, Black Knight Financial Services data shows.
In April, nearly 2 million modified mortgages — mortgages whose terms were adjusted to help homeowners hold onto their homes — were facing interest rate resets in the years ahead, and 40 percent of them were underwater, according to Black Knight Financial Services’ latest Mortgage Monitor Report.
Data shows that negative equity is “one of the primary drivers” of defaults, according to Black Knight Financial Services. So it stands to reason that many borrowers who are already struggling with negative equity might throw in the towel if their mortgage payments increase.
If interest rates on all modified mortgages reset in April, homeowners paying a total of 800,000 mortgages would have been forced to grapple with the pressure of negative equity and increased mortgage payments, according to Black Knight data. That number will decrease if home price appreciation continues, however, because price gains lift people out of negative equity.
“Given that the data has shown quite clearly that equity — or the lack thereof — is one of the primary drivers of mortgage defaults, these resets may indeed pose an increased risk in the years ahead,” said Kostya Gradushy, Black Knight’s manager of loan data and customer analytics, in a statement.
Many of the modified mortgages facing rate resets were modified under the Home Affordable Modification Program (HAMP). The program lowered rates on some mortgages to as low as 2 percent. But the lowered rate generally lasts for only five years.
After that, the rate is supposed to increase by as much as 1 percent a year until it reaches the market rate of the time when the modification took place. For the first borrowers to participate in HAMP, interest rate increases began this year.
About 800,000 homeowners with HAMP modifications in November of 2013 were scheduled to have their mortgage interest rate and payments increase, and those increases were supposed to take place between 2014 and 2021, according to a federal analysis released in January.
The increases will push up the $773 median monthly payment on a HAMP modified mortgage to $989, the report found. In some cases, the interest rate resets could push payments up by as much as $1,724, according to the report.