Durbin’s new initiative is raising the hopes of cramdown proponents. At Creditslips, University of Illinois law professor and credit expert Robert Lawless called Durbin’s revival “hopefully an indication there may be some interest in moving the legislation forward.”

There have been increasing reports (e.g., here) recently that lenders are not doing voluntary mortgage modifications in the numbers that need to happen. Yeah, I know — who could have possibly foreseen the possibility that a solely voluntary system would not work? There need to be carrots that encourage lenders to do the modifications. The change in the bankruptcy law is the missing piece — the stick that makes the program work.

A renewed interest in cramdown may have less to do with a sudden acknowledgement of its merits than the shortfalls of Making Home Affordable, the Obama administration’s program to encourage loan modifications. The goal of that program is to rework loans for 3 to 4 million borrowers. But a new report by the General Accounting Office calls that estimate too optimistic. It also says the administration needs to do more to make sure servicers are equipped to participate – and that they follow the rules, CNN Money reports.

The GAO also critiqued the administration for not having the controls in place to properly monitor the program. Specifically, the agency is concerned that Treasury is not evaluating servicers’ capacity to meet the plan’s requirements and guidelines. Also, the agency has failed to fully staff the Homeownership Preservation Office, which is responsible for overseeing the modification program.

And, though Treasury has hired Freddie Mac to review servicers’ performance, it has not put established procedures to address those servicers who don’t comply.

Already, reports have surfaced that financial institutions are not adhering to the program’s rules. At a Senate Banking Committee hearing last week, a consumer advocate said some servicers are violating the guidelines by demanding upfront payments, denying borrowers not in default and initiating foreclosures while borrowers’ applications are being reviewed. Senator Christopher Dodd, D-Conn., has asked the administration to look into these allegations.

Given those drawbacks, it’s little wonder that tactics like cramdown are being revived. The Obama administration plans to meet with servicers July 28, to pressure them to modify more loans. But with rising unemployment contributing to a record 1.5 million foreclosures just in the first half of this year,  a strategy that involves more than just a carrot may be called for. The Obama administration stood on the sidelines before, as cramdown failed, and has openly abandoned the idea. But unless it can get servicers to not only write down loans but to reduce loan balances as well — something that hasn’t happened so far –  it may be forced to rethink that decision and take a second look at cramdown, the missing stick in its strategy so far.

This morning the Press Democrat ran a front page article titled: “Fight Against Blight“. It details the plight of Phyllis Sharrow of Petaluma who has the unfortunate luck of living next to a foreclosed property. Weeds have overtaken the lawn of the abandoned home next door and her property value is being affected. Calls to Bank of America to try to get the place cleaned up go unanswered. This has been going on for 2 years prompting her to put a sign outside her home with an arrow pointing at the foreclosure stating: “Bank of America. Your taxpayer bailout dollars at work. Our home values lose!”

And there’s a bigger shock for poor Ms. Sharrow: According to the Healdsburg Housing Bubble blog, Bank of America issued a notice of foreclosure but never completed the foreclosure sale. In other words, Bank of America walked away, letting the property sit there, in limbo, the owners gone and no one taking responsibility for it.

It looks like the home was never foreclosed on and therefore is not owned by the bank.

Is Bank of America just sitting on this loan and letting the property deteriorate? I’ve heard that banks are reluctant to foreclose because A) this forces them to recognize a loss on the loan, and B) if they do foreclose they are the owners and are responsible for the property taxes.

To me it looks as if that is what is happening here. But how long can this go on? You would think the banks would want to flush out these loans before the mid- to high-end foreclosure crisis is upon us.

Yes, you would think that — especially from banks propped up by a taxpayer bailout. So far, however, servicers are too swamped to modify large numbers of loans and — as this case illustrates — banks are walking away from their properties, even beyond the Rust Belt.

You can’t blame homeowners like Ms. Sharrow for feeling like they are hardly getting their money’s worth from that bailout. Maybe she needs to bring that yard sign to Washington, where few are paying much attention to the problem of bank-owned abandoned homes. Instead, as Sen. Dick Durbin (D-Ill.) pointed out recently, the banks own the place.

And those banks aren’t up against outraged and powerful lawmakers, calling them on the carpet for these practices. Business just goes on as usual. Meantime, in the real world, there’s a frustrated neighbor, a two-year battle, and a yard sign calling for attention.