July 10 (Bloomberg) -- U.S. banks are likely to begin signing contracts as soon as this month that would let second mortgages and other home-equity debt be reworked under a government-subsidized program, a Treasury official said.

Contracts may be signed this month or in early August, the official, who asked not to be identified discussing private talks, said in an e-mail yesterday. On April 28, when provisions for the expansion of President Barack Obama’s $75 billion “Home Affordable” plan were announced, officials said the second-lien program would be up and running in about a month.

The home-equity program offers U.S. funds to loan servicers, lenders and borrowers when debt is forgiven or reworked to lower payments. It is meant to further aid consumers and housing markets, while responding to concern among mortgage- bond investors that banks such as JPMorgan Chase & Co. and Wells Fargo & Co. would modify first mortgages they don’t own to improve the quality of their untouched second-lien portfolios.

“The major banks should not recapitalize themselves by picking the pockets of investors, including pension funds representing millions of workers,” Bill Frey, head of Greenwich Financial Services LLC, a mortgage-bond broker and investor in Greenwich, Connecticut, said in an e-mail today.

Obama’s mortgage-modification program, projected to aid as many as 4 million homeowners when announced Feb. 18, is among steps taken by the government to stem record U.S. home-price declines roiling the global economy. Real-estate values in 20 major cities tumbled 18.1 percent in April from a year earlier, according to an S&P/Case-Shiller index.

Geithner, Donovan

Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan, in a letter yesterday to 25 mortgage servicers, pressed them to step up efforts to modify loans under the program.

“Since we published our detailed guidance, we have started to see a significant ramp-up in the number of trial modification offers and trial modifications under way,” according to the letter, which was reported earlier by the Wall Street Journal. “However, much more progress is needed.”

Home-loan servicers manage debt on behalf of their own companies or other firms that own or guarantee securities backed by the loans, handling tasks such as collecting and passing on borrower payments.

Banks signing up for government payments under the home- equity program will be required to rework in certain ways or retire the debt for consumers whenever they do Home Affordable modifications on homeowners’ mortgages. They aren’t permitted to hold off on changing the first loan until the second loan is renegotiated, the official said.

Largest Banks

The largest U.S. banks are likely to sign up, covering most home equity loans, the official said.

New York-based JPMorgan, Wells Fargo of San Francisco, Charlotte, North Carolina-based Bank of America Corp., and Citigroup Inc. of New York, the four-largest servicers, own about $450 billion of home-equity loans, according to a report from Amherst Securities Group LP.

“We fully support the Home Affordable Modification Program, and we’re committed to working with all struggling borrowers using this program and the other options we have available to help those at-risk,” Kevin Waetke, a spokesman for Wells Fargo, said in an e-mail. “We will continue to work with the Treasury and the administration to ensure HAMP is as effective as possible.”

Tom Kelly, a JPMorgan spokesman, declined to immediately comment. Mark Rodgers, a Citigroup spokesman, didn’t immediately return a telephone message.

Can’t Take Place

The modifications of the second liens can’t take place until the expiration of the trial periods of the first mortgages, which will be in late July at the earliest, Rick Simon, a Bank of America spokesman, said in an e-mail.

The bank “is aggressively developing the capabilities to modify associated second liens upon successful completion of the trial period on the first lien,” he said. “We expect that Treasury will issue final comprehensive program guidelines next week and then we will be in a position to consider the contractual agreement and move ahead with final preparations.”

Today, Senate Banking Committee Chairman Chris Dodd and House Financial Services Committee Chairman Barney Frank asked the heads of U.S. banking regulators to look into whether their companies are carrying home-equity loans at “potentially inflated values,” which “may contribute to resistance on the part of servicers to negotiate the disposition of these liens.”

The reluctance may be hindering the Federal Housing Administration’s Hope for Homeowners program, under which borrowers who owe more than their homes are worth get part of their mortgages forgiven as they refinance into new government- insured loans, the Democrats said in the letter.

Four Banks

“It is well understood that the four major banks would likely need an additional capital injection should they be forced to mark the second-lien mortgages on their balance sheets to a realistic value,” Greenwich Financial’s Frey said.

While under the Home Affordable program, servicers must offer the Hope for Homeowners aid to eligible borrowers, the plan otherwise doesn’t call for first-mortgage balance reductions, focusing instead on reducing housing payments to 31 percent of borrowers’ pay. Lawmakers authorized the FHA program last year, and then revised rules in May after limited use.

Banks including Bank of America, Citigroup and Wells Fargo have received capital under the $700 billion U.S. Troubled Asset Relief Program. JPMorgan has repaid the TARP funds it accepted.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

Last Updated: July 10, 2009 15:49 EDT