U.S. Treasury, mortgage firms discuss aid efforts

WASHINGTON, May 6 (Reuters) - U.S. Treasury officials and mortgage servicing executives met on Tuesday to discuss ways to speed loan modifications and prevent more foreclosures, including how to resolve conflicts between mortgage investors.

The staff-level meeting, which did not include U.S. Treasury Secretary Henry Paulson or domestic finance undersecretary Robert Steel, addressed technical issues, including those impeding progress for private-sector efforts to modify troubled mortgages.

"These meetings are routine meetings to focus on ways to make the Hope Now program more effective," said Treasury spokeswoman Jennifer Zuccarelli. "We are always looking for ideas that will enable the member companies to help more struggling homeowners."

The Hope Now coalition of mortgage servicers, lenders, investors and credit counselors is the Treasury's main effort in addressing the U.S. housing downturn. The group is working to help modify mortgage terms for homeowners who can no longer afford their monthly payments.

Thus far, however, it has not taken major steps to write down the principal amount of loans, particularly for homeowners who are "under water" and now owe more than their homes are worth.

Participants in the meeting declined to talk to reporters as they left the Treasury on Tuesday afternoon, deferring any public comment to the Treasury.

THREE-LOAN MONTY

A major topic of the meeting was how to tackle conflicts between first-lien and second-lien mortgages in reducing principal, according to people familiar with the discussions.

Under today's mortgage finance system, two or even three lenders will participate in a single home purchase in higher-priced markets, and under a plan under consideration in Congress, a loan principal reduction could wipe out the second- or third-lien holder, sometimes leaving the first-lien holder with no losses.

These loans also may be split up into different mortgage-backed securities, so some investors could lose out.

A mortgage aid plan expected to pass the U.S. House of Representatives this week calls for the federal government to absorb many failing loans for investors who agree to erase a large share of the original loan amount.

But mortgage servicers have complained that the plan by U.S. Rep. Barney Frank, chairman of the House Financial Services Committee, could leave second- and third-lien investors out in the cold while homeowners and the Federal Housing Administration profit from a potential rise in home values. Thus, a large share of mortgage investors may turn their backs on the plan.

Frank, a Massachusetts Democrat, said that as many as 2 million homeowners could be saved under the program. But last week the nonpartisan Congressional Budget Office said that no more than 500,000 loans would pass through the program, chiefly because second-lien holders could balk and refuse to take part. (Reporting by David Lawder and Glenn Somerville; Editing by Leslie Adler)