The Obama administration’s Home Affordable Modification Program (HAMP) is too focused on subprime loans to head off a projected 10 million to 12 million foreclosure starts that lie ahead if unemployment remains elevated, according to a report by a Congressional Oversight Panel.

The panel, created in conjunction with the Troubled Asset Relief Program (TARP) to keep tabs on financial markets and the regulatory system, said that even if the HAMP program meets a goal of facilitating up to 4 million loan modifications, its scope is too narrow to address foreclosures caused by unemployment.

“The foreclosure crisis has moved beyond subprime mortgages and into the prime mortgage market,” the report said. “It increasingly appears that HAMP is targeted at the housing crisis as it existed six months ago, rather than as it exists right now.”

The report recommended that the U.S. Treasury Department find ways to provide foreclosure mitigation for the unemployed and borrowers with pay-option adjustable-rate mortgage (ARM) and interest-only loans before emerging problems “reach crisis proportions.”

The HAMP program should also provide better information to borrowers on eligibility and denials, and institute a more uniform and streamlined process for modifications, the report said.

Senior Obama administration officials met with mortgage servicers this week to discuss how they can improve their efficiency and responsiveness to borrowers seeking loan modifications, even as servicers beat the administration’s goal of achieving 500,000 HAMP trial loan modifications by Nov. 1.

In announcing that the first major HAMP milestone had been reached Thursday, the Treasury Department acknowledged “more can and should be done to assist struggling homeowners and to stabilize the housing market.”

The Treasury Department currently estimates it will spend $42.5 billion of the $50 billion in TARP funding allocated for the HAMP program, which will support about 2 million to 2.6 million modifications, the oversight panel said in its report.

The report cited three fundamental weaknesses in the HAMP program.

First, the program is too narrow in scope, the report said. Not only was the program not designed to address foreclosures caused by unemployment, but many borrowers with payment-option ARM and interest-only loans don’t meet the program’s eligibility requirements.

The second problem is scale. Although the report was prepared before the Treasury Department released HAMP figures for September, even the Treasury’s goal of making 25,000 to 30,000 loan modifications per week will prevent less than half of expected foreclosures, the report said.

The third problem with the HAMP program is permanence, the report said. Many homeowners who receive HAMP modifications may eventually end up in foreclosure anyway, because they end up with more negative equity or payments that increase after five years. The report estimated that one-third of the nation’s 51.6 million homeowners with mortgages are underwater.

Nearly two-thirds of borrowers who have received loan modifications that did not reduce their monthly payments end up redefaulting within nine months, according to a recent report by the U.S. Office of the Comptroller of the Currency and the Office of Thrift Supervision.

By contrast, nearly two-thirds of borrowers who received loan modifications that reduced their payments by 10 to 20 percent were still making payments after nine months, and nearly 70 percent of borrowers who saw their payments reduced by 20 percent or more were still current, that report said.

More than three out of four loan modifications made by lenders during the second quarter reduced borrowers’ monthly payments, up from 54 percent in the first three months of the year, bank regulators said.

Several members of the Congressional Oversight Panel provided their own views on the report.

Panelist Richard Neiman, New York’s Superintendent of Banks, said he agreed with the report’s central themes and recommendations, but added that it’s “too early to judge the program or imply it will not succeed.”

HAMP modifications have resulted in a mean interest-rate reduction of 4.65 percent, from approximately 7.58 percent to approximately 2.93 percent, he said. Borrowers are seeing mean monthly savings of $740 per loan, reducing payments from on average from $1,890 to $1,150 — a 39 percent payment decline.

As HAMP gains momentum, “savings to homeowners and investors and the benefits to society should be enormous,” Neiman said in a statement published along with the report.

“We should give the program time to work and revisit HAMP within six months when a better track record and better service quality and performance results are available,” Neiman said.

The Mortgage Bankers Association said Thursday that reaching the 500,000 HAMP trial modifications milestone “shows the industry is working hard to help borrowers who want to stay in their home and have the means to pay their mortgage keep their homes.”

In addition to the 500,000 trial modifications started under the HAMP program, servicers have completed a “large volume” of modifications and other loan workouts outside of the HAMP program, the MBA said.

The HOPE NOW coalition of mortgage servicers, investors and mortgage insurers on Sept. 30 announced that participants completed 325,842 workout plans in August, a 28 percent increase from the month before. Repayment plans increased 38 percent to 239,982 while loan modifications were up 7 percent to 85,859, the group said.

Foreclosure starts fell 21 percent from July to August, to 224,262, while foreclosure sales were down 16 percent, to 75,063.

HOPE NOW loan servicers have completed 2.1 million workouts this year, and 5.27 million since the coalition was formed in the third quarter of 2007.

HOPE NOW estimates 2 million homes started the foreclosure process in the first eight months of 2009, and that there have been 5.26 million foreclosure starts since third-quarter 2007.

The group counted 601,445 foreclosure sales in the first eight months of this year and 1.84 million since the third quarter of 2007.

The reverse mortgage, which has proven very popular with the retirement-age crowd, has come under assault from two diverse groups: the government and scam artists.

Now I’m not going to argue with anyone who tries to say the government and scam artists are two sides of the same coin. That seems a bit mean.

After all, the government attempts (or is supposed to attempt) to do what’s best for the consumer and the country, although sometimes the net effect of legislation appears to be as wounding to some people as theft through fraudulent practices.

In regard to reverse mortgages, the government is, indeed, trying to protect their availability through conservative fiscal practices. Unfortunately, it could end up neutering them instead.

A reverse mortgage, which is available only to those 62 and older, allows homeowners to use the equity that has built up in a residence. In effect, the homeowner gets a loan in the form of a lump sum or multiple payments. Repayment, with interest, is deferred until the owner dies, or goes into aged care, and the home is sold. Or, in a worst-case scenario, if the homeowner fails to pay property taxes or homeowners insurance.

After being introduced with the new decade, reverse mortgages didn’t really gain any traction in the marketplace until 2005, when just under 50,000 were written. Growth came quickly since then, with totals surpassing 100,000 in 2007. The Wall Street Journal predicts the total number of federally insured reverse mortgages could run as high as 150,000 this year.

Here’s the problem: About 99 percent of reverse mortgages are FHA-insured. In scrutinizing the reverse mortgage loan outlook for fiscal year 2010 (which began Oct. 1, 2009), the Federal Housing Administration and Office of Management and Budget felt the reverse mortgage market — which had previously always paid its own way — would run about 130,000 loans (a more conservative estimate).

And the expectation was that over the life of those loans there would be losses in the range of $800 million.

That, of course, would mean an additional subsidy to cover the expected loss or, in the thinking of the Congress, to adjust the program so that it doesn’t require any further dollars.

Two questions arise: Is an additional subsidy necessary? And what would it mean to the efficacy of the reverse mortgage?

“The FHA and OMB did some calculations on what they believe the volume of originations will be in the next fiscal year and what they expect the behavior of the loans to be — most importantly, what will happen to housing prices,” explains Jeff Lewis, chairman of Atlanta-based Generation Mortgage Co., the largest independent reverse mortgage originator in the country.

“Presumably, if housing prices are weak next year, that means loans got originated at too high a loan-to-value (ratio) and it would make the loans less creditworthy. We don’t know what they used as far as their assumptions, but it would appear their estimates are very draconian about housing prices.”

To make the loans more creditworthy, the U.S. House and Senate are considering reducing the amount of loan value that can be pulled from a reverse mortgage by 5 percent to 10 percent.

That could be a problem.

“If you have a $400,000 house, by today’s factor the consumer could get a $250,000 loan,” explains Lewis. “If Congress reduces that by 10 percent, or to $225,000, that makes the product inherently more creditworthy, but less attractive from the borrower’s perspective, as most of our borrowers are driven by a need for proceeds.”

According to calculations from the National Reverse Mortgage Lenders Association, the Washington, D.C.-based trade group for the industry, a 10 percent reduction would mean that 21 percent of 130,000 households, or 27,000 households, would be forced to give up their homes as a result of that cut.

“I don’t think anyone wants to be responsible for telling 27,000 seniors that they have to leave their homes,” says Peter Bell, president of NRMLA. “That’s a powerful argument politically.”

Bell proposes an alternative: to increase the income the program generates by raising the mortgage insurance premium (MIP). One of the criticisms of reverse mortgages is the large, upfront MIP. NRMLA’s recommendation is to lower the upfront, but raise the ongoing payments by borrowers.

Currently, the borrower pays 2 percent of the home value upfront and then another 1/2 percent per year on the actual balance being drawn down. The NRMLA would prefer to reduce the upfront from 2 percent to 1 percent but increase the ongoing to a full 1 percent.

The other problem facing reverse mortgages is a reported increase in scams. Although the occurrence of scams are still relatively small in number, they seem to be coming from two sources: third parties, such as a title agent involved in the process, but more often than not the relatives of the seniors who participate in a reverse mortgage.

“We just do the loan and the third parties taking advantage of the borrowers are usually financial advisers or someone selling a financial product whom we are not affiliated (with) and don’t know,” says Lewis.

That’s still just a small problem. The bigger fraud comes from the familial network.

“The largest source of scams and thefts with people who have gotten a reverse mortgage are family members who steal from the grandparent or parent,” says Bell. “More often than not, the theft is tied to substance abuse by the child or grandchild.”

It seems, once the senior gets the dollars from a reverse mortgage a whole new set of problems arise. The new predator is someone whom you know very well.

…And so are the number of borrowers seeing their credit scores plummet, according to scoring company VantageScore Solutions

When you do a short sale of a house, or modify the mortgage, is there much of an effect on your credit score? What if you walk away from the mortgage altogether?

A scoring company created by the three national credit bureaus — Equifax, Experian and TransUnion — has some eye-opening numbers. VantageScore Solutions, whose risk-prediction scores are now being used by some of the largest mortgage companies and banks, has found that the way consumers handle their mortgage problems can have profound effects on their credit scores.

For example, loan modifications that roll late payments and penalties into the principal debt owed on the house can actually increase borrowers’ scores modestly. Refinancings of underwater, negative-equity mortgages — which the Obama administration’s Making Home Affordable program offers through government-controlled Fannie Mae and Freddie Mac — may have little or no negative effect on scores, even though the homeowners might have been tottering on the edge of serious delinquency before refinancing.

The Vantage credit score, the primary competitor to the long-dominant FICO credit score, rates borrowers on a scale range of 501 (subprime, the highest risk) to 990 (super-prime, the lowest risk). Unlike Fair Isaac Corp.’s FICO scoring system, whose scores can vary by 50 to 100 points based on which bureau supplied the underlying credit data, Vantage scores are about the same for each consumer.

When homeowners negotiate a short sale with lenders, they sometimes assume that there will be relatively little effect on their scores. After all, the loan was successfully paid off, there was no foreclosure, and the lender voluntarily agreed to accept a lower balance than was owed.

But according to VantageScore researchers, short sales can trigger big drops in credit scores. Sarah Davies, senior vice president of analytics, said a homeowner with an excellent score of 862 might plummet 120 to 130 points after a short sale.

Although it’s true the lender may lose less money through a short sale compared with a foreclosure, “it’s still a derogatory event,” Davies said. The full debt was not repaid and the lender lost money.

What happens when borrowers walk away from their mortgage debts altogether — the so-called strategic defaults that have become commonplace in some large markets such as in California? They should expect 140- to 150-point hits to their scores, plus negative marks on their credit bureau files for as long as seven years.

People who file for bankruptcy protection covering all their debts (mortgage, credit cards, auto loans, etc.) will get hit with an average 355- to 365-point drop in their scores. Bankruptcies remain on borrowers’ credit bureau files for 10 years.

With all the mortgage delinquencies, short sales and foreclosures experienced by U.S. consumers in the last couple of years, has there been a deterioration of average scores across the board? Absolutely.

For example, roughly 36.6 million of the 213 million consumers tracked by the three national credit bureaus in the first quarter of 2008 had Vantage scores above 900 — the super-prime credit rung. That select group represented 17.2% of the country’s consumers.But by the end of the second quarter of this year, just 15.4% — 33.3 million out of 216.9 million individuals’ files — were left among the elite. By credit industry standards, that’s huge.

More Americans’ scores are slipping into the worst credit category as well. In the third quarter of 2006, 34.4 million consumers were in the lowest segment — 16.6% of 206.9 million individuals. But by the second quarter of this year, 18.3% of all files were in that category — 39.8 million consumers out of 216.9 million.

Most of these changes — fewer people with excellent credit, more people in the lowest brackets — have been caused by late payments on home mortgages, serious delinquencies, short sales and foreclosures, according to VantageScore researchers.

But the bottom-line good news about scores is that homeowners facing financial stress can experience minimal dings to their credit if they contact their loan servicer or lender early in the game — when they first discover that they may have trouble making their monthly payments — and take the first steps toward a loan modification or refinancing.

“Start that conversation early,” said Barrett Burns, a former lender and now chief executive of VantageScore. If you wait and fall several payments behind before seeking a modification

Dear Ginny: We just received a letter from our mortgage company telling us that they can lower our monthly payment by $100 per month if we refinance our house. We have owned our house for five years and estimate that we have about a 20 percent equity position. After discussing this situation with the lender, I discovered that all the lender was going to do was to drop our private mortgage insurance (PMI). When I asked why the lender couldn’t just drop it without us having to refinance, the lender told me it wasn’t possible unless we refinanced. Lowering our payment by $100 per month would really help us out. Do we have any other alternatives? –Fauna & Tom L.

I continue to hear stories from homeowners who are experiencing what resembles a bait and switch from their lenders. The scenario goes something like this: “We can help you lower your monthly payments” or “You have been preapproved for lower payments on your current loan.” The homeowners then submit all the paperwork that the lender requires, only to discover that they don’t qualify for the lower rate with no points and fees. Instead, they can obtain the interest rate that they want but they will have to pay points and fees.

This is a great situation for the lender for two reasons. First, the lender makes money now because of the additional points and fees. Second, the lender will issue you a new 30-year loan and you will begin paying the loan down again from the beginning. The lender gets the largest part of the interest payments at the beginning of the loan. Quite simply, this is an excellent way for the lender to generate additional cash now while also improving future cash flow. If you keep the same loan and just eliminate your PMI, the lender makes no additional money. This may be part of the reason the lender was pressuring you to refinance.

There are several ways that you can remove the PMI from your property. To understand how this works, it’s important to understand exactly what PMI is. According to the Federal Reserve: “PMI is extra insurance that lenders require from most homebuyers who obtain loans that are more than 80 percent of their new home’s value. In other words, buyers with less than a 20 percent down payment are normally required to pay PMI.”

The Homeowner’s Protection Act of 1999 (HPA) outlines several different avenues for eliminating your PMI payment. The most common way that owners eliminate their PMI payment occurs when they either pay down their existing mortgage so that they have a 20 percent equity position, or when the loan amount is 80 percent of the property’s current value. From your letter, you may already qualify.

HPA guidelines say that you are eligible to eliminate PMI when you pay down your mortgage “to the point that it equals 80 percent of the original purchase price or appraised value of your home at the time the loan was obtained, whichever is less.” The lender will require proof that you do not have any secondary financing (e.g., a home equity loan) on the property. To qualify, you cannot have been 30 days late on your payments during the last year or 60 days late within the last two years.

Under HPA, lenders are required to automatically cancel your PMI once your mortgage is 78 percent of the value of your original loan. If your loan is not a conforming loan, the number where automatic termination kicks in is 77 percent. Again, you must be current on your existing loan. To see when you will reach that number, here are two separate calculators from two different sites: Federal Reserve and PrivateMI.

In the past, a number of my clients were able to have their PMI removed by working with an appraiser and/or from a comparable market analysis (CMA) that I prepared for them. Appraisals can be expensive ($500 or more), but if you are already paying $100 per month in PMI it would probably be worth it to explore this avenue. Alternatively, contact the agent who sold you the house and ask her to do an updated CMA on the property.

Ask her to do a price-per-square-foot analysis and to provide pictures of comparable sales if possible. The more detail you have for the lender, the easier it will be to persuade them.

Furthermore, Zillow, Trulia and HomeGain are among the online sites that offer comparable sales information. Check these resources to see if they support your case. If they do, then use them. If not, ignore them.

Good luck getting rid of your PMI. If you don’t qualify right now, continue to track your property value as well as how much you have paid down on your loan. The sooner you can get rid of the PMI, the more money you can save.

Such transfers normally take place without a hitch. But you need to make sure the rightful loan servicer receives your payments. It’s the mortgage market’s equivalent of a Dear John letter: “Goodbye. We’ve sold your loan to another lender.”

Some borrowers receive the missive a few days after they close on their loans. Sometimes it arrives years later. But over the life of the mortgage, practically every homeowner is sure to receive one. The loan may be sold two, three or even four times to other lenders.

In mortgage-industry parlance, it’s called a “transfer of servicing.” But although some borrowers may take the notice as a personal affront, it’s really nothing to fret about.

“People shouldn’t take it personally,” said Alan Jones, senior vice president for servicing at Wells Fargo Home Mortgage. “It doesn’t have anything to do with anything they have done. It’s a standard business practice.”

Wells Fargo is one of the few lenders that rarely transfers the servicing rights to the loans it originates. Otherwise, the practice is very common.

About half of all loans are sold at the time of their origination, usually by lenders who simply are not equipped to collect payments, manage escrow accounts, pay taxes and insurance, respond to questions and prepare payoff statements when you sell or refinance. And most of the rest are sold later.

Why? Because administering loans has value. About one-quarter of 1% of the interest rate you pay goes to the firm that services your mortgage.

That doesn’t make it any more palatable for homeowners who now must mail their checks across the country instead of across town and speak with a faceless clerk in some other state, rather than the person down the street they’ve come to know and trust.

In reality, though, the change could be beneficial. Not only will you be dealing with a firm that can provide the service you deserve, but your new servicer also may be able to offer products and services not available from the original one.

Normally, handoffs from one lender to another take place without a hitch. Every so often, though, the seller or the buyer drops the ball. So you should take steps to make sure that yours isn’t fumbled.

Under the National Affordable Housing Act, you should receive a “goodbye” letter from your current servicer at least 15 days before your next payment is due. The letter must state the name, address and telephone number of the new servicer, the date the old company will stop collecting payments and the date the new company will start accepting them.

Under the Helping Families Save Their Homes Act, signed by President Obama on May 20, the new owner of your loan — which may or may not be the servicer — must also notify you of the transfer within 30 days.

You also should receive a “hello” letter from the new servicer that outlines the same information. But if you receive only a welcome letter, be wary; you may be the intended victim of a scam by someone who is hoping to persuade you to mail your payments to him.

If you just get the one letter from the new servicer, call the old one to verify that your loan has been transferred. If it hasn’t, notify the authorities.

Once you are certain an exchange has taken place, follow the instructions contained in the welcome letter. If you don’t, you run the risk of the payment not arriving on time.

If you send your payment to the former servicer, the company usually will forward it to the new one. But it won’t continue to do so for long. So if you keep making this mistake, your payments could become lost and you could incur late fees.

Often, the new servicer will send a new coupon book. But if your next payment is due before the coupons arrive, write your loan number on the check and send it so it arrives on time. It’s also a good idea to include the appropriate coupon from the old servicer. But either way, keep your own records.

If you make your payments through an electronic-funds transfer or automatic draft, you will need to cancel your old arrangement and start a new one. And because this often takes time, you may have to make your first payment to the new servicer by check.

Even if you follow the new servicer’s instructions, Jones of Wells Fargo says it’s always a good idea to monitor your account closely for a while “just in case there’s a disconnect.”

The new servicer cannot change the terms of your mortgage. Your loan number probably won’t be the same. (Keep track of your old loan number in case you have any questions.) But your rate, term, payment date and other conditions must remain the same.

However, at some point after the exchange, the new servicer will analyze your escrow account to determine whether an adequate amount is being collected each month along with your principal and interest payments to cover your property taxes, hazard insurance and mortgage insurance. If not, your total monthly payment could go up.

If you were specifically allowed to pay taxes and insurance on your own under the old mortgage, the new servicer cannot now demand that you establish an escrow account. But if the contract was neutral on the issue or merely limited the actions of your old service, the new one may be able to require such an account.

If you receive a notice during the transition period that either your insurance or taxes are due, call the new servicer to make sure that it has gotten the same notice. It is the old servicer’s responsibility to notify the tax collector and insurance company of the transfer. But if it messed up, you’ll get the bill.

How much your home is worth depends on who’s looking at it. Your home insurer will value your home in terms of the cost to rebuild it. A mortgage lender’s appraiser will value your property in terms of the sale prices of similar homes in your neighborhood that sold recently. The property tax assessor may have a different set of criteria.

Due to recent changes in the economy, the market value of your home could be considerably less than it was a few years ago. However, don’t be too quick to ask your insurance carrier to drop the valuation on your homeowner’s insurance. This would save you money but could leave you underinsured.

Replacement cost and market value aren’t necessarily the same. When home prices peaked in 2006, the market value of your home might have been much higher than the replacement cost value. Today, the sale price of your home could be a lot less than the cost to rebuild.

Talk to your insurance agent about how much coverage you need. This will depend on the square footage of your home, upgrades and amenities, and the price per square foot to rebuild in your area.

HOUSE HUNTING TIP: Most states levy property taxes, and the property tax structure and rate varies from state to state. In California, your initial property tax assessment is based on the purchase price. If you purchased your home in 2006, your property tax base could be higher than your home’s current market value. In this case, you can appeal to the assessor’s office for a reduction in your property taxes.

The current appraised value of your home, or one you want to buy, may be lower than you expected due to changes brought about by the Fannie Mae Home Valuation Code of Conduct that took effect May 1, 2009. One of the major changes is that loan originators — mortgage brokers and loan agents — can no longer talk directly to the appraiser.

This new restriction, while intended to be in the consumer’s best interest by keeping loan originators from pressuring appraisers, is resulting in misleading valuations — not in every case, but in enough cases to raise concern.

Many loan originators now order arm’s-length appraisals from third-party appraisal services. Some of the appraisers who work for these companies are hired to appraise properties outside their area of expertise. In one case, an out-of-area appraiser used a property in East Oakland, Calif., as a comparable for a home in Albany, Calif., a much pricier community located 15 miles away.

Appraisers used to appraising homes in planned-unit developments where there is uniformity in the housing stock often have a hard time making sense of market value in areas with a lot of diversity.

For example, some older neighborhoods were developed over several decades. Some homes have been remodeled and some not. House size can differ significantly. A 1,500-square-foot home could be next door to one with 2,400 or 3,000 square feet.

Another negative repercussion of the new code of conduct is that there are more inexperienced appraisers doing appraisals. Many of the experienced appraisers, who have plenty of work, won’t work for fees offered by the third-party appraisal companies, which may take a big chunk of the fee to run their companies.

Homebuyers or homeowners trying to refinance who receive a low appraisal should ask to see the comparable sales used by the appraiser. Even though your mortgage originator can’t talk to the appraiser, a homeowner or real estate agent can.

THE CLOSING: Ask your real estate agent to provide you with recent comparable sales that closed within the last three months. Then, ask the appraiser to consider these.