Companies that service risky residential mortgages are warning U.S. officials that a key program to slow foreclosures may push some financing costs higher and derail their efforts, said a leading subprime firm.

Companies forming the Independent Mortgage Servicers Coalition, service many of the riskiest mortgages made during the housing boom, making them key players in programs to rein in foreclosures. The group collects and distributes payments on more than $700 billion in loans, according to its leader, Carrington Mortgage Services of Santa Ana, California.

Their concerns about financing payments for defaulted homeowners comes as pressure mounts from Congress, regulators and state legislators for servicers to do more for the plan, which aims to slow foreclosures and modify loans. The U.S. Treasury wants the companies to spend more on its resources, including hiring staff and expanding training programs.

At least four servicers from the coalition were among the 25 meeting with the Treasury on Tuesday, where new commitments were forged to increase foreclosure prevention efforts under President Obama's Home Affordable Modification Program.

But manpower isn't the main worry for the independent servicers, which don't include large banks such as Wells Fargo & Co. Implementing the program means giving delinquent homeowners more time fix their loans, which to servicers will the boost costs of extending payments to investors as contractually promised.

Matching costs of servicing to public policy is growing increasingly difficult, said Bruce Rose, chief executive officer and general partner of Greenwich, Connecticut-based Carrington Capital Management, LLC, which owns CMS. Rose attended the meeting with Treasury.

We are in a position where it's a very tough balance act, and that's weighing heavily on us now, said Rose, in an interview on Monday. This is a classic case of an unfunded government mandate.

The costs of borrowing to finance delinquent payments to bond investors far outweigh expected revenue from incentives paid by the government, Rose said. The government will pay servicers $1,000 for every loan modified, and another $1,000 a year for three years if the borrower stays current.

The group since September has approached the Treasury, the Federal Reserve and Congress for help in funding the temporary advances that are fully reimbursed when a loan is modified or foreclosed, Rose said. Help offered through the Fed's Term Asset-Backed Securities Loan Facility (TALF,) which allows for the pooling of advances for sale to investors, has backfired, and is increasing financing costs, he said.

The coalition -- which has included Ocwen Financial Corp (OCN.N), GMAC-RFC, and Fortress Investment Group's (FIG.N) Nationstar Mortgage -- also tried unsuccessfully to arrange liquidity via the Troubled Asset Relief Program in 2008. GMAC-RFC is no longer a member, a spokeswoman said.

Standard & Poor's this month delivered a blow to Carrington and other potential issuers of TALF-eligible bonds backed by servicing advances, by sharply discounting the value of the assets that would go into the deals, Rose said. For Carrington, that would mean just 64 cents of every dollar in assets would garner a AAA rating, the blessing required for inclusion in a TALF deal.

That is harsh, Rose said, since advances are first in line for repayment -- ahead of AAA bondholders -- when a bad loan is resolved. There has never been a loss on advances, but S&P told Carrington it will assume 2.0 percent losses and multiply them eight times to reflect high stress scenarios. More discounting is done for interest expense.

S&P's assessment may not only hinder TALF funding, but significantly boost Carrington's borrowing costs, Rose said. While one Carrington lender saw S&P's assessment as baseless, another has hit the servicer with a margin call.

S&P ratings and bank credit lines give servicers incentives that run counter to public policy, he said. To reduce discounts assessed by rating companies, and to lower borrowing costs from banks, servicers would have to foreclose faster, not more slowly, as would be required under Obama's plan, he said.

The funding problem could be resolved if TALF issues would accept implicit ratings, which for advances are AAA, since they are senior to the safest bonds in the security, he said.Unless independent servicers get new liquidity, this is going to bring (HAMP) to a screaming halt, in at least our shop, he said. We are running out of capacity.

Carrington has modified about 45 percent of subprime loans in its servicing portfolio that were made from 2005 to 2007.

California Mortgage Foreclosures