A new report from Black Knight Financial Services shows that, as of April, there were approximately 2 million modified mortgages whose interest rates are due for an increase – 40 percent of which remain underwater. That could provoke a fresh increase in defaults and delinquencies, the data and analytics firm said.
"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," Kostya Gradushy, Black Knight’s manager of loan data and customer analytics, said in a statement. "While the national negative equity rate as of April stands at 9.4 percent of active mortgages, the share of underwater modified loans facing interest rate resets is much higher-over 40 percent. In addition, another 18 percent of modified borrowers have 9 percent equity or less in their homes. 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."
The firm also noted that more than one in 10 borrowers is in "near negative equity," meaning the borrower has less than 10 percent equity in his or her home. This puts them at risk of default, too, should home prices dip. The number of near negative equity borrowers is particularly high in New Mexico and Southern states.
Black Knight also found that mortgage prepayment rates, historically a good indicator of refinance activity, increased for the second consecutive month as interest rates have stayed low. However, the data also showed that adjustable rate mortgages (ARMs) with notes below 6 percent were prepaying at significantly higher speeds than their fixed-rate mortgage counterparts. This suggests that concerns about rising interest rates persist among the borrower population, despite the recent pullback in 30-year conforming rates.
Foreclosure sales also increased in April in both judicial and non-judicial states, but the increase was larger in the former than the latter. As a result, the gap between the number of homes in the foreclosure pipeline in judicial and non-judicial states has narrowed to its lowest point since at least 2005. The judicial states’ pipeline ratio now stands at 52 months, as compared with its high of 118 months back in 2011. In contrast, the non-judicial states’ pipeline ratio at that time was 33 months-it has now increased to 48, its highest point on record.
The total U.S. loan delinquency rate in April was 5.62 percent, down 1.84 percent from March. The total U.S. foreclosure inventory rate was 2.02 percent, down 5 percent from March.
