Inman News offered a good update on loan modifications. More than eighty-five percent of mortgage loans are now covered by the Homes affordable Modification Program. Forty-seven servicers ae now participating, up from 38 in July. Progress is always slow, but it’s progress. Look how long it took for glaciers to carve out Canada.

Four servicers, including JP Morgan Chase and GMAC, have begun trial modifications on at least 25% of loans they service that are sixty or more days past due. They need to be applauded for proactivity. Wells Fargo and Bank of America, on the other hand, are only working with 11% and 7%, respectively, of similarly delinquent borrowers.

HAMP officials, while saying that more must be done, do seemed pleased with the intervention thus far nudged along by financial incentives for servicers, and think it will all be better once the program is ramped up. HAMP also provides borrowers and servicers financial incentives for short sales and deed-in-lieu-of programs.

One of Wells Fargo’s problems is that nearly three-quarters of the loans it services are held by foreign investors. The terms of the service agreements conflict with the terms HAMP requires from lenders.

Under HAMP, servicers use a slightly complicated formula of comparing net present value (NPV) of cash flows with and without modifications. If the test is positive, the servicer must re-work the loan so that the payment is 31% of the borrower’s income. For loan servicers, HAMP provides matching dollars to get the payment to the 31% level. There are other significant financial incentives to both borrower and servicer if the loan stays current for five years.

Could there be a budding scam? Economist Paul Willen, an advisor to the Federal Reserve Bank in Boston, says that the best way to keep a loan from defaulting is to have loaned to a creditworthy borrower in the first place. Under HAMP, what’s to keep servicers from cherry picking the loans to modify by selecting only the most creditworthy, who might not default anyway, and modifying those loans in order to pocket the incentives?

Stay tuned for this one.