NEW YORK (CNNMoney.com) -- The bullhorn message from the government to mortgage lenders has been: Bend. Do what you can to help struggling homeowners.
The message to troubled homeowners has been: Call your lender. You may be able to work something out.
Despite the persistent blare, there is not a whole lotta "loan modifying" going on yet.
A survey by Moody's found that most subprime-loan servicers this year had modified only about 1 percent of their adjustable-rate mortgages (ARMs) that had reset to higher rates by the end of July. Servicers, which may or may not be the original lender, collect mortgage payments and deal with defaults and foreclosures.
At the Consumer Credit Counseling Service (CCCS) of San Francisco, which has been working with borrowers referred by lenders, a loan modification is the rare exception rather than the rule.
In a modification, a loan servicer could, for instance, freeze the loan's introductory rate for 24 months or fix that rate for the remainder of the loan.
But based on what the credit counselors have seen from lenders' responses, "if a borrower is behind because of the rate hike, in general that is not enough of a reason to modify the loan. The borrower needs to have a reason [e.g., losing one's income or a medical crisis] and proof they can make the modified payment," said Erica J. Sandberg, CCCS of San Francisco's financial education and communications advisor.
And lenders are not likely to even consider a modification unless a borrower is already behind in their payments, Sandberg said.
There are competing reasons for why modifications are few and far between, and they don't necessarily speak to willful refusal on the part of lenders and servicers.
Swamped lenders. Lenders have been bombarded with requests for modifications and aren't adequately staffed to handle them, according to Mortgage Bankers Association spokesman John Mechem, who added that lenders are in the process of hiring more people.
Borrowers in too deep. Loan modifications don't make sense for some borrowers since they've already had trouble handling their mortgages before their rates reset higher. In those cases, Sandberg said, modifications "just stretch out the problem."
For those borrowers, a credit counselor might recommend they ask their bank to agree to a short sale in which the bank will forgive the debt not covered by the sale of their home. Or they might pursue a deed-in-lieu-of-foreclosure - whereby they sign over the deed of their house to the lender and walk away without further obligation. If they choose this option, they may be able to minimize damage to their credit if they ask the lender to remove the negative reference on their credit report, according to legal information publisher NOLO.
The "Mother, may I?" factor. Servicers who get loans in securitized bundles - say 3,000 to 5,000 loans per deal - may be restricted in how many loans they may modify without seeking the permission of investors in those securities, said Larry Litton, president of Litton Loan Servicing. A 5 percent cap on the amount of loans that may be modified is typical.
What's more, the servicers' contracts with investors may have rules governing when modifications may be made.
The "Are you my mother?" factor. Sometimes no one knows who to ask for permission to modify a loan. "The loans have been sliced and diced so many times, that the owners cannot be found," said Center for Responsible Lending senior vice president Eric Stein, in written Congressional testimony delivered this week.
No-shows. There has been a push by lenders to contact at-risk borrowers earlier and more frequently. But the borrowers are hesitant. Litton said that for every six letters he sends to at-risk borrowers, he might get one response.
In some cases, if borrowers overstated their income on their original loan application to buy more home than they could afford, they're reluctant to admit that to the servicer since lying on a loan is illegal, said Allen Hardester, a mortgage consultant in Maryland.
Why it pays to modify more loans
Some servicers, like Litton, have made a concerted effort to modify loans whenever they can.
Litton estimates his company will have modified 2,000 loans in September, up from 1,400 in August. Of those 2,000 loans, he said, roughly 1,500 are loans in which the borrowers are already delinquent in their payments and the other 500 are loans that were current but which would have reset within 90 to 120 days.
Of the loans he's modified so far this year, he estimates that about half were cases in which he opted to allow the borrower to keep their current rate fixed for the remainder for the loan.
Modifying loans in advance of their becoming delinquent makes good business sense, Litton said. It costs him six or seven times more to service a delinquent loan than a current one because of the added time and expense required to make calls to delinquent borrowers and to analyze the loans gone bad.
And foreclosure is a losing proposition altogether. A Federal Reserve study found that up to 60 percent of the outstanding loan balance can be lost to legal fees, foregone interest and property expenses.
-- Les Christie contributed to the reporting for this article 
