The Obama administration has for months pressured the mortgage industry to bail-out homeowners who have fallen behind in their mortgage payments. Now, it wants the industry to try harder.

According to the Wall Street Journal, "The Obama administration is pressing mortgage-servicing companies to step up their efforts to modify troubled loans under its housing-rescue program, the latest sign of frustration with the pace at which mortgage companies are reworking troubled loans."

Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan wrote in a letter to 25 mortgage-servicing firms that there is a need for servicers to devote "substantially more resources" to this program, the paper said.

One problem: the results of the government-mandated kindness have been terrible.

In April, the Office of the Comptroller of the Currency said that re-default rates on modified mortgages were "both high and rising during the first three quarters of 2008." An astonishing 41 percent of modified loans were seriously -- 60 or more days -- delinquent in the first quarter. The figure rose in the second quarter to 46 percent and the trend appeared to be continuing during the third quarter.

According to the OCC, the reasons for the high default rates are not clear. They could be a result of poor underwriting -- which was a huge problem during the bubble -- excessive borrower leverage or the general poor state of the economy. There is another problem to consider: psychology.

About 20 percent of U.S. homeowners have mortgages that are "underwater" -- meaning they couldn't pay off their mortgages if they sold their homes. In other words, what is supposed to be their biggest asset has become their biggest liability. People are loathe to put good money after bad, no matter how much affection they might feel for their residence. The problem is spreading to home equity loans, where the American Bankers Association said that defaults have reached an all-time high.

Bankers are against cramdowns -- allowing bankruptcy judges to reset the value of mortgages -- but I don't see how they can be avoided. I know that some will say that this rewards people who bought more house than they could afford and turns contract law on its head.

But the alternative of letting the market "sort out" the mess of the housing market is too painful to contemplate.

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oram020347

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