The U.S. Treasury Department on Thursday announced changes to encourage mortgage lenders to slash loan payments in the worst-hit markets and use so-called short sales to extract troubled home owners from unaffordable mortgages.

The Treasury will use up to $10 billion from a previously announced $50 billion pool of mortgage modification funds for payments to address lender concerns that home prices will continue falling in high-cost areas. These incentives will be calculated on recent declines of local home prices and average home prices in these markets, the Treasury said.

Under the short sale program, lenders can receive a $1,000 payment for allowing the owner to sell the house for less than the amount owed on the mortgage and accepting the proceeds as full repayment. They can also receive $1,000 for accepting a similar deed-in-lieu transaction, in which the deed is simply transferred to the lender instead of going through a costly foreclosure.

Borrowers who agree to short sale or deed-in-lieu deals can received up to $1,500 in closing costs and Treasury also will pay second lien holders up to $1,000 to relinquish their claims in such transactions, the Treasury said.

The new incentives are among a number of recent refinements to the Obama administration's housing rescue programs. A Treasury spokeswoman said these payments will come from the same $50 billion used to encourage other types of loan modifications and extinguishment of second-lien mortgages.

Since the program started in March, the Treasury said more than 55,000 loan modification offers have been extended to borrowers. About 300,000 letters have been sent to homeowners who might qualify for modifications.

U.S. Treasury Secretary Timothy Geithner said the program would aid modifications in areas suffering from home price declines. If a modification is not possible, we are also announcing steps to encourage the quick private sale or voluntary transfer of property, which will save homeowners money and protect their financial future, Geithner said.

Historically low interest rates are allowing Americans to refinance and save money, and modifications are helping homeowners avoid foreclosure, Treasury Secretary Timothy Geithner said in a statement.

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