A recent report by Fitch Ratings, a global credit-rating agency, says 65% to 75% of certain types of modified home loans will redefault within 12 months. This is because many homeowners receiving loans through the Home Affordable Modification Program (HAMP) still have too much debt to continuously make good on payments.

"Many of these borrowers still have very heavy levels of other debt," Diane Pendley, a Fitch managing director, told CNN. "The HAMP modifications reduce housing expenses down to 31% of income, but do not touch these other obligations."

Fitch’s recent findings support an earlier report by the Congressional Oversight Panel that concluded the HAMP program was not as effective as intended. HAMP was started as part of the Financial Stability Act of 2009 in an effort to help some of the estimated 7 million to 8 million homeowners at risk of foreclosure by working with lenders to lower monthly mortgage payments. When the government initially rolled out the HAMP program, it estimated that 3 million to 4 million people would receive assistance. During the past year, HAMP has provided 295,348 borrowers a permanent modification to help lower their current monthly payments. The loan types facing the 65% to 75% risk of default are modified sub-prime and Alt-A loans.        

In an effort to account for this problem, the U.S. Treasury introduced the Home Affordable Foreclosure Alternatives (HAFA) program. Essentially, the program encourages banks to execute a short sale (where the bank or lender allows the owner to sell their property for less than what they owe) or deed-in-lieu (in which the borrower gives their home to the lender to be released of all mortgage obligations).

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