The Obama administration put heavy pressure on the country's largest home loan servicers last week to speed up modifications of hundreds of thousands of homeowners' mortgages.

But the series of lender meetings with the Treasury department and HUD was the smiley-face side of a double edged strategy: If lenders and loan servicers don't pick up the pace of modifications dramatically, Congress is poised to force them to do so.

Here's what's taking shape and what it may mean to home owners behind on their loans:

The White House extracted promises from the 25 largest mortgage servicers - including Bank of America, Wells Fargo, and Citigroup - to accelerate the pace of their loan restructurings under the administration's “Home Affordable Modification Program.”

The immediate goal is to get at least 500,000 “trial” modifications underway by November 1. The administration first unveiled its program back in April, with the objective of helping three to four million home owners who no longer can afford their payments and are sliding toward foreclosure.

Applicants must first demonstrate that they can handle reduced payments on the modified loan for three months. After that, the new, lower payment terms are finalized, ideally allowing the owners to remain in their properties.

So far, however, only about 200,000 modifications have actually been put into place. That's far too few for the administration.

Servicers and lenders emerging from the Washington meetings last week said they are now committed to shift into high gear and get 500,000 modifications on the books by the target date.

A joint statement from the Mortgage Bankers Association, the Financial Services Roundtable and the Housing Policy Council said their members are “committed to helping at-risk borrowers with workout solutions to help avoid foreclosures.”

But on Capitol Hill, skeptics said that's all too little, too late.

Illinois Democratic Senator Dick Durbin said it's “time to revisit” legislation empowering bankruptcy court judges to impose involuntary modifications on lender, including slashing principal balances of delinquent borrowers.

Durbin's bankruptcy bill was defeated earlier this year, but he says the key argument against it at the time was - let's give the industry a chance to modify loans on their own.

But now, says Durbin, “it's time to admit that isn't working.”

What's the outlook here for homeowners in need of modifications? They can probably expect banks to be somewhat more accommodating in the weeks ahead.

But at the same time, the heavy artillery will be rolling out on Capitol Hill with the menacing message to lenders: Modify your customers' loans. Or we'll modify the bankruptcy code to make you do it.

Published: August 3, 2009

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.