Based on an analysis of mortgages modified between 2008 and 2013 to help distressed homeowners dodge foreclosure, many of the loans may be back in danger of default as their temporary interest rate reductions expire.
Black Knight Financial Services, which prepared the report, suggests that some borrowers will not be able to handle the gradual interest-rate hikes and higher payments that come with them. This is particularly true if the loan balance is greater than the property's current value, as is the case for about 40 percent of the loans. "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," warns Black Knight's Kostya Gradushy.
The firm looked at both proprietary and government loan workout programs.
In addition to borrowers who benefited from modifications, it also waved a red flag for those who, with less than 10 percent equity, are on the brink of being underwater. For these homeowners, Gradushy explains, even the slightest price adjustment can have huge ramifications. For example, a 0.25 percent decline in property values from December through January spiked the number of underwater loans in the Fort Hood, Texas, area by 20 percent.
Moreover, low-equity sellers probably will have to bring cash to settlement to cover agent commissions. "So even if your house is worth exactly what you owe on your mortgage, you are still technically underwater," according to Gradushy.