UPDATE 1-U.S. mortgage modifications dip in May

(Adds Hope Now comment in paragraph 6, ABS impact in paragraphs 9-11)

By Al Yoon

NEW YORK, July 2 (Reuters) - U.S. mortgage companies helped slightly fewer borrowers avoid foreclosure in May than the prior month, but the second quarter will likely be the busiest in a year-old program to ease the housing crisis, according to an industry alliance.

Mortgage servicing companies negotiated new payment plans with about 100,000 troubled homeowners, and changed the terms on another 70,000, the Hope Now alliance said on Wednesday. At the current pace, total "workouts" would reach 519,000 in the quarter, the most since the program started reporting its results in July 2007.

Total workouts for May eased from the 182,901 Hope Now reported for April. Modified loans often feature lower interest rates or a write-down of principal owed.

Overall modifications by servicers have increased since last year as lenders boosted efforts to curb pressures on their profits and investors caused by soaring delinquencies. They are also responding to calls from regulators and lawmakers to get ahead of the wave of foreclosures that are depressing home prices and U.S. economic growth.

Investors have also complained that servicing companies with shrinking profit margins are not making the effort they could to bring homeowners current in their payments.

Mortgage companies "are facing a tough market and helping as best they can," said Faith Schwartz, executive director of Hope Now. Capacity of loan servicers to handle the workload has improved, she said.

Hope Now, which includes big mortgage companies such as Wells Fargo & Co. (WFC.N), was created under guidance from the U.S. Treasury to find common ground on foreclosure prevention. Member companies have helped 1.7 million homeowners in the past year, but many economists still expect foreclosures to rise and home prices to fall.

UBS Securities on Tuesday forecast that foreclosures would not peak until mid-2009 because of falling home prices, tighter lending and an economic recession.

Despite good intentions, modifications have caused angst in the $2.5 trillion asset-backed securities market that financed the boom in subprime mortgages. Bond contracts written before modifications were being made in large numbers have come under scrutiny by investors concerned about fair treatment.

Investors balked after a sharp increase in modifications by Ocwen Financial Corp (OCN.N) in April resulted in the trustee stripping the cost of write-downs from a pool for interest payments, rather rather applying the loss to junior investors that agreed to accept higher risk. Investors hit by the error were repaid in May, but that didn't help the growing distrust among investors competing for scraps of the battered bond.

"It continues to highlight the fragile balance between the interests of 'AAA' holder and all others," said a bond manager at a large endowment fund.

Sales of foreclosed homes edged up in May from April, Hope Now data showed. Mortgage companies reported 163,649 sales in the two months combined, on pace to far exceed the 198,172 sales in the first quarter.