Theo Francis of Business Week has a smart piece about how the Treasury Dept. might cajole mortgage servicers to more energetically participate in a mortgage modification plan whose original goal was prevent four million foreclosures. The New York Times’ Peter Goodman, among other finance reporters, has recently blew the lid open on the program’s failures. Yet, as Francis reports, Treasury can’t force banks to help homeowners:

Treasury relies heavily on voluntary agreements and cash incentives to get servicers to help homeowners, both with primary home loans and with an as-yet incomplete program to tackle the second mortgages and home-equity lines that complicate many mortgage modifications. But servicers can opt to drop out of most of the Treasury programs. Ultimately, servicers may conclude that the Treasury needs them more than they need the government. Both the Bush and Obama administrations encountered great consternation whenever there was talk of meddling directly with existing mortgage contracts, particularly about the expense of buying up loans and modifying them en masse, as was done in the Great Depression. As a result, the emphasis has been on voluntary programs, on cajoling and jawboning banks and investors to go along.

Francis has some hope for “moral suasion” — especially on the part of banks that Treasury bailed out. But it’s not like banks could become more unpopular if they continued to resist permanently modifyunderstandinggov.org least, the voluntary program creates an anxious situation for cash-strapped homeowners.

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