About 2 million homeowners who got a reprieve on their high mortgage rates five years ago through a loan modification process are about to be in for a shock as the loans hit the reset button.
It’s not clear whether these homeowners will be able to handle to the higher payments, according to an analysis by mortgage research firm Black Knight Financial Services.
The company says that more than 40 percent of these people have homes that are currently underwater with the property owners owing more than the homes are worth, according to the data.
“Many people who faced financial crisis during the last five years are still digging themselves out of a hole,” said Al Ripley, director of the consumer and housing project at the North Carolina Justice Center, a Raleigh group that advocates for economic, political and social justice. “It places these people at risk of foreclosure, a situation that is only exacerbated by underwater mortgages.”
In addition, 18 percent of the borrowers with modified loans have 9 percent equity or less in their homes, the company found. Negative equity is “one of the primary drivers of mortgage defaults,” said Kostya Gradushy, Black Knight’s manager of loan data and analytics. “These resets may indeed pose an increased risk in the years ahead.”
CoreLogic estimates that 39,003 homes in the Charlotte-Gastonia-Concord area are underwater with an additional 18,683 properties having less than 5 percent equity.
Homeowners with little equity face few options. They can’t sell the home or refinance it once the higher rates take hold, which increases the chances of default.
“People with underwater mortgages have no incentive to stay in their homes,” said Ripley. “They’re more likely to walk away from the property.”
Many of the loans facing resetting rates – though not all 2 million – were modified through the Home Affordable Modification Program, or HAMP, which lowered some interest rates to as low as 2 percent but only for five years from the time of the modification.
After that period, the interest rate rises incrementally by 1 percent a year until it reaches the national average for a 30-year loan at the time of the modification.
The U.S. Treasury Department, which runs the program in conjunction with the U.S. Department of Housing and Urban Development, issued a report in January saying that nearly half of the 800,000 homeowners who applied for the loan modifications did so in 2009 and 2010, meaning that many of these loans are about to reset.
The increases will push up median monthly mortgage payments initially from $773 to $989, according to the Treasury report.
In Charlotte, more than 4,000 homeowners will be affected by the loan resets. Data from the Treasury Department shows that these homeowners will see an average monthly increase of $125 with a total median interest rate increase of 2.125 percent.
The federal government in 2009 had instituted the program under the assumption that in five years’ time the economic environment would have improved significantly.
Ripley believes that there are remedies to provide relief for homeowners facing resets. He thinks the federal government should change its policy and issue fixed-rate mortgages to those households who took advantage of the HAMP modifications. On the state level, Ripley thinks the General Assembly needs to re-examine North Carolina’s foreclosure process.
Louise Mack runs a housing counseling office in Kannapolis called Prosperity Unlimited. The agency, certified by the U.S. Housing and Urban Development office, has helped at least 15,000 struggling families over the last 10 years stay in their homes through a variety of programs, including HAMP. She says that, so far, neither she nor any of the counselors at the office have heard from consumers anxious about resetting rates.