May 14 (Bloomberg) -- The U.S. Treasury, seeking to strengthen government anti-foreclosure programs, will provide new incentives for lenders to modify mortgages where home-price declines are most severe or to pursue so-called short sales.

“These are critical steps in stemming the foreclosure crisis and stabilizing the housing market, both of which are critical to our economic recovery,” Treasury Secretary Timothy Geithner said at an event in Washington to announce changes to the Making Home Affordable program.

The new compensation for lenders is designed to help more borrowers whose home values are below what is owed on the mortgage obtain loan modifications or more easily sell off the property. About 20.4 million of the U.S.’s 93 million houses, condos and co-ops had loan balances higher than the properties were worth as of March 31, according to data service Zillow.com.

“We’re not going to fix all problems and this won’t help all homeowners,” Geithner said, adding that the effect of the program will still be “powerful.”

The Making Home Affordable program, announced in February, seeks to cut monthly mortgage payments for borrowers by reducing interest rates, lengthening repayment and forgiving principal in some cases. The program, part of the biggest federal foray into real estate since the Great Depression, seeks to curb a jump in foreclosures that, along with a drop in consumer credit, is dragging down the economy.

Short Sales

Geithner and Housing and Urban Development Secretary Shaun Donovan spoke at the headquarters of the National Community Reinvestment Coalition, the nation’s largest affordable-housing nonprofit advocacy group.

Donovan said earlier this week that lenders participating in the program have taken “hundreds of thousands” of applications and have already modified “tens of thousands” of loans to make them more affordable. Donovan said in a May 12 interview on Bloomberg Television that JPMorgan Chase & Co. has modified at least 15,000 loans under the president’s plan.

Borrowers must make three months of timely payments before they qualify for federal aid, which will keep their interest rate as low as 2 percent for five years. When a modification isn’t feasible, the Treasury said it’s encouraging lenders to approve a “quick private sale or voluntary transfer.” A short sale is when a bank agrees to let a delinquent homeowner sell the property for less than the outstanding mortgage balance.

Home prices in the U.S. dropped the most on record in the first quarter from a year earlier, led by California and Florida, as banks sold foreclosed properties. The median price fell 14 percent to $169,000, the National Association of Realtors said May 12.

U.S. banks held $26.6 billion of repossessed real estate at the end of 2008, more than double than a year earlier, according to the Federal Deposit Insurance Corp. in Washington. The banking industry lost $26.2 billion in the fourth quarter, the largest loss in FDIC records.

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net.

Last Updated: May 14, 2009 11:57 EDT