UPDATE 2-Some banks still lag on mortgage modifications-US

* Government to Bank of America, J.P. Morgan: shape up

* Banks stingier on loan modifications in July

* Mortgage cuts program badly lags original intentions
(Adds quotes, details)

WASHINGTON, Sept 1 (Reuters) - A government report on
Thursday showed that banks granted fewer stressed homeowners a
permanent break on their monthly mortgage payments in July than
in June and singled out two big banks for poor performance.

Bank of America (BAC.N) and JPMorgan Chase Bank (JPM.N)
"remain in need of substantial improvement" in implementing the
Making Home Affordable Program and will have financial
incentives withheld until they shape up, the report from the
Treasury and Housing and Urban Development departments said.

The report showed that 28,328 homeowners received
permanently lower monthly mortgages from banks in July, down
from 31,620 who were able to negotiate lower payments in June.

The program provides financial incentives to servicers that
are intended to help borrowers rework their mortgages and avoid
having them foreclosed.

So far, it has produced 675,447 still-active permanent loan
modifications since it was started in late 2009, fewer than the
administration's goal of helping up to four million people.

A total of 791,399 loan modifications were started but a
total of 115,952 were canceled for various reasons.

The report said the government continues to try to get
mortgage servicers to provide better and more effective service
to struggling homeowners and said "the continued fragility of
the housing market" underscores the need to do so.

It looked at the servicers' records during the second
quarter in contacting homeowners who qualify for help as well
as how efficiently they assessed their cases and managed them
once an effort at negotiation was under way.

Bank of America and J.P. Morgan Chase got harsh
assessments.

"Both servicers were subject to withholding of financial
incentives under the program based on results from the first
quarter and will continue to have their incentives withheld
until their performance improves," the report said.

The loan modification program was started in response to
the housing downturn that coincided with the 2007-09 financial
crisis and that has never really let up.

Many people have found themselves unable to keep up
mortgage payments because jobs remain scarce in a weak economy
while others now are "under water" because falling home prices
mean their home loans exceed the value of the properties.
(Reporting by Glenn Somerville; Editing by James Dalgleish)