UPDATE 1-U.S. targets poor-performing mortgage servicers

WASHINGTON, June 9 (Reuters) - The U.S. Treasury has started withholding payments to three of the biggest mortgage servicers because of their poor performance in modifying loans under a federal program to assist homeowners behind in their payments.

Wells Fargo (WFC.N), Bank of America (BAC.N) and JPMorgan Chase & Co (JPM.N) need to make substantial improvements in the way in which they process applications for home loan modifications, a report to be issued later will say, a Treasury spokeswoman confirmed on Thursday.

The Washington Post first reported on the Treasury action.

Another servicer, Ocwen Financial Corp (OCN.N), was found in need of improvements but will not be subject to financial remedies at this time, the Treasury spokeswoman said.

Treasury did not indicate the size of the payments withheld from the three banks. A spokeswoman said it will offer more detail when it issues an assessment of the 10 largest mortgage servicers and said it will also set out new requirements for disclosure about homeowner assistance they are providing.

There have been widespread complaints about the Obama administration's loan modification program, called Home Affordable Modification Program or HAMP, for being cumbersome and slow.

Mortgage servicers get financial incentives for helping borrowers work out loan modifications but consumer advocates say it has so far helped far fewer people than had been hoped.

As a result, the housing sector lags far behind the rest of the economy in the halting recovery from the 2007-2009 financial crisis and has become a point of potential vulnerability for the administration ahead of next year's presidential election.

More than 3.5 million homes have been foreclosed on since the beginning of 2007, when the housing market entered its freefall, according to real estate data firm RealtyTrac.

Home prices in March slumped to lows not seen since March 2003, and 10.9 million, or 22.7 percent, of homeowners are under water, meaning they owe more than their home is worth.

When the HAMP program was launched, the administration said it expected 3 million to 4 million homeowners would benefit from it by having their loans modified to permit lower payments or extend the period over which they could be made.

To date, however, only 670,000 homeowners have actually won lower payments. (Reporting by Glenn Somerville; Editing by Theodore d'Afflisio)