Treasury Secretary Timothy Geithner gave a fairly strong endorsement to Jeff Merkley’s plan to set up an HOLC-type authority to purchase and refinance current underwater mortgages, and plans to work with him to set up pilot programs by the end of the year.

Testifying before the Senate Banking Committee today, Geither was asked by Merkley about the plan, which I profiled here. Geithner’s response was surprisingly positive.

Despite the heavily lobbied narrative that housing is in the midst of a recovery, the reality is far more stark. New-home and existing-home sales fell last month, and what stability we’re seeing on prices comes in large part from a massive shadow REO that isn’t sustainable. Mortgage delinquencies actually rose in June. And you have 11 million underwater homeowners who are sitting ducks to fall into delinquency, with one financial shock potentially putting them into that category. What’s more, many of them are unable to take advantage of low mortgage rates for refinancing.

The Administration’s efforts on this front have been sadly lacking. But Senator Jeff Merkley is out with a plan that should have been adopted years ago.

A Boston non-profit has announced a pilot program with mortgage banks (e.g., Bank of America) to purchase near foreclosure mortgages at market value and re-finance to the home owners at just above market prices. It’s effectively a principal write down, a better deal for the banks that could help a few homeowners too.

One of the more amusing moments of yesterday’s House Financial Services Committee hearings on foreclosure fraud was when the representatives for the loan servicers were asked why they were subsidiaries of the large financial institutions. The link between the servicers and the big banks, mainly caused by a series of mergers, leads to all kinds of conflicts of interest, because it inevitably pairs them up with the originator or trustee of the loan. The servicers had no real answer to this question. Finally, the Wells Fargo representative claimed that it was for “customer convenience,” because some customers had their mortgage and their checking accounts at the same bank.

Everyone’s jaw dropped in the hearing room.

Now Miller is out with a letter, signed by all the top leaders of the House Financial Services Committee, that seriously ratchets up the demands on the Financial Stability Oversight Council. Among other things, it asks the FSOC to use its authority under Dodd-Frank to force the large financial institutions to divest from the loan servicers.