Nearly 2 million loan modifications are facing interest rate resets in the near future, and of those, about 40% are underwater, according to Black Knight Financial Services' Mortgage Monitor Report.
What's more, more than 10% are in ‘near negative equity’ positions, with 9% equity or less.
Some fear that when these loans reset, it could trigger another wave of foreclosures.
‘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,’ says Kostya Gradushy, manager of loan data and customer analytics for Black Knight, in a release.
Gradushy says although there has been ‘a continual reduction in the number of underwater borrowers at the national level for some time now â�¦ modified loans show a different picture.’ He points out that ‘slim margins in equity can have a significant effect on overall negative equity levels with even slight variations in home price index.’
Many of the borrowers who are ‘near negative equity’ are in New Mexico and the southern states, he says. How great the risk of foreclosure is for these loans largely depends on how much home prices continue to rise.
The report also finds that gradually rising interest rates are causing many borrowers with adjustable-rate mortgages (ARMs) to accelerate prepayment speeds. ARMs with interest rates below 6% are prepaying at faster speed than fixed mortgages, according to Black Knight.
The report also finds that the gap between judicial and non-judicial states' pipeline ratios is narrowing and is at its lowest since at least 2005, as the bulk of the shadow inventory has now been liquidated.
The total U.S. loan delinquency rate, as of April, was 5.62%, an increase of 1.84% compared to March.
The total U.S. foreclosure pre-sale inventory rate was 2.02%, a decrease of about 5% compared to March.
States with highest percentage of non-current loans include Mississippi, New Jersey, Florida, New York and Louisiana.
States with the lowest percentage of non-current loans include Montana, Arkansas, Colorado, South Dakota and North Dakota.