About 2 million borrowers with modified mortgages are facing interest rate hikes, according to Black Knight’s April Mortgage Monitor Report. What’s more, about 40 percent of those borrowers currently remain underwater, owing more on their mortgage than their home is currently worth.
The lack of equity is one of the primary drivers of mortgage defaults and “these resets may indeed pose an increased risk in the years ahead,” says Kostya Gradushy, Black Knight’s manager of loan data and customer analytics. “We have seen a continual reduction in the number of underwater borrowers at the national level for some time now, but modified loans show a different picture.”
Nationwide, the negative equity rate is 9.4 percent of all active mortgages. An additional 18 percent of borrowers with modified mortgages have 9 percent equity or less in their homes, which poses some concern, Gradushy says. In addition, More than one of every 10 borrowers is in a ‘near negative equity’ position, meaning the borrower has less than 10% equity in his or her home.
“If you do not have about 10 percent equity in your home, you don’t make any money if you sell the house because closing costs are about 8 percent,” says Jim Gaines, research economist with the Real Estate Center at Texas A&M University.
And this comes amid a wave of lower mortgage rates and the 30-year, fixed-rate mortgage hitting the lowest level in almost nine months.
“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,” Gradushy added.