As foreclosure numbers keep growing nationwide lenders are facing more pressure to make home loan modifications, or workouts, more meaningful. Up to now their efforts have mostly been half measures from the borrower's perspective, backed by recent stats that around half of modified home loans re-default within six months. That surely isn't helping the pummeled real estate market to recover, something everyone ought to strive for, and thus help the entire economy get back on track.   

The entities operating between distressed homeowners and the investors who have bought their underlying mortgages usually are the servicing firms. They are the key players, work under contract for the investors and naturally first look for what's good for them. And that means modifying as little as possible. For loan workouts to have more bite the contract terms need to be adjusted or otherwise the whole exercise is largely wasted. Foreclosures would keep rising, home values head further south and at the end the investors would suffer even bigger losses when their deeply discounted, foreclosed property is finally sold.

To make modifications work better loan balances should be lowered bravely and not just a token 10% or so. They ought to be brought down close to where the market is, which of course will hurt the investors at first. But that's the reality right now. When homeowners are upside down by a large percentage they really have very little incentive to do everything they can to make payments. However, if they are looking at newly-adjusted mortgage balances hovering somewhere near actual market value they will most likely make the extra effort to struggle on. It's clear that the housing market is not turning around any time soon and bail the investors out. They have to accept that and base their decisions accordingly.

Another way to lower payments meaningfully is reducing interest rates. And do it so that it would make a real difference, enabling homeowners to stay in their houses. If this avenue is used aggressively, the mortgage balance may not need any adjustment at all, or very little, making it perhaps a more palatable option for the investors.    

It has been rather puzzling to watch lately how aimless the investment community has been in dealing with the growing foreclosure problem. Because of that Washington is likely to get involved and that might not be the best alternative either.