HUD and the Treasury Department are taking another crack at moving its foreclosure prevention efforts from concept to reality.  And now it is adding "shame" to its list of weapons.

The Treasury Department announced today that it intends to increase pressure on lenders and servicers to move borrowers from trial loan modifications into actual restructured loans.  The action comes amid reports that the administration's $75 billion Making Homes Affordable Program (HAMP) is floundering.

While the government has been trumpeting the success of the trial modification program - some 650,000 troubled borrowers had entered the program by the end of October - only a very small percentage of those borrowers have transitioned into a permanent loan modification.  It is estimated that November figures will show completed modifications to number in only the tens of thousands coming out of close to ¾ million trials.

The Treasury has announced plans to assign officials to monitor the largest mortgage servicing companies on a daily basis and will require companies to develop and report their specific plans to increase the number of modifications they complete.  Loan servicers may face monetary penalties and sanctions if they fail to fulfill plans. Treasury is also expected to delay incentive payments to servicers until individual modifications are permanent.

The Wall Street Journal and others are quoting Michael S. Barr, assistant secretary for financial institutions who directs the HAMP program, as saying that banks are not doing a good enough job.  "Some of the firms ought to be embarrassed and they will be.  They're not getting a penny from the federal government until they move forward," Mr. Barr said.  According to Barr, the government will publicly identify lenders and servicers who are not performing under the program and that they will be particularly focusing on those companies that are not doing a good job.

It is hard to know where to place blame for the apparent failure of HAMP.  Some critics have said that the program is unworkable in that it was designed for last year's problems. It was supposed to cushion homeowners against the rate shock expected when the discounted teaser rate mortgages and option mortgages that were written during the housing boom reset.  Instead, foreclosures are now increasingly hitting families who have suffered job losses and other financial setbacks and cannot afford even the modified payments required under the program. 

Other critics have placed the blame squarely on the shoulders of the banks and servicers.  There are claims that servicers are profiting unduly from late and legal fees, that foreclosures result in a greater return than restructuring the loans, and that the servicers are entering into trial modifications in order to collect the incentives and to wring a few additional payments out of defaulting borrowers.  Still others say that it is the investors who actually own the mortgages who are unwilling to modify the loan terms.

There are also reports that servicers are apparently either unable or unwilling to handle the actual mechanics of the modifications.  Borrowers complain that they are cannot get through to appropriate departments, that the documentation they provide is repeatedly lost, even that fax numbers are abruptly changed.

The servicers say that they are doing a good job and are making a good faith attempt to comply with the requirements and guidelines of the program.

According to the Times, there is now discussion in the Senate about a national foreclosure relief program based on one now in use in Philadelphia.  In that city mortgage companies are forced to submit to court-supervised mediation with the borrower before they are allowed to proceed to foreclosure.  Democrats in Congress are also a low pushing to allow the bankruptcy courts to "cram downs" mortgage balances to an amount compatible with the current market value of the house.  

One has to wonder, might the plan to pressure loan servicers actually be counterproductive?