The Obama administration on Thursday tweaked its housing rescue plan by increasing incentives for mortgage lenders to slash the payments for homeowners in the worst-hit markets.

The changes announced by the Treasury Department would also encourage so-called short sales to help troubled homeowners escape from unaffordable mortgages. In a short sale, the lender retires the mortgage in return for whatever the homeowner can sell the property for.

This will give (lenders) payments to mitigate some of the risk that past house price declines might reduce future payments. The way to think about this is an additional incentive for lenders and servicers to participate in these programs, U.S. Treasury Secretary Timothy Geithner told a news conference.

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, and may add several thousand dollars to other incentives that servicers can receive for reducing loan payments.

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.

INCENTIVES FOR BORROWERS

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

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.

About $15 billion of these funds, from the Treasury's Troubled Assets Relief Program, have already been allocated to incentives for 14 major loan servicers under the program's initial phase.

The $50 billion, combined with $25 billion in costs absorbed by Fannie Mae and Freddie Mac, will fund other incentives for lenders to extinguish second-lien mortgages.

The single most critical step we need to make to stabilize home prices is to stop the bleeding and prevent what could be up to 10 million foreclosures looming on the horizon, said National Community Reinvestment Coalition president John Taylor.

He also said more actions from the Obama administration may be needed to stabilize the housing market.

GOOD START?

Since the program started in March, the Treasury said more than 55,000 loan modification offers have been extended to borrowers from servicers, who also have sent about 300,000 solicitation letters to borrowers who would qualify.

That is far short of the 3 million to 4 million loan modifications that the Obama administration hopes to achieve in the program.

This is just the beginning. We're at the beginning of progress in these programs, Geithner said.

He also said the new incentives would encourage modifications in areas suffering from steep price declines and lenders and investors have been reluctant to modify over fears that a downward price spiral will push the loan back into default.

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.

A U.S. Treasury official later told reporters on a conference call that a separate program that allows Fannie and Freddie refinance mortgages at up to 105 percent loan to value ratio could be examined in the future for possible for changes to raise that cap. The official said such a move was not under active consideration now, but the Treasury was committed to continue to examine the program for its effectiveness.

In some hard-hit markets such as California and Florida, price declines have been steep enough that many loans written during the housing boom exceed 105 percent of the underlying home value, making them ineligible for refinancing under the program.

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