Look how far we've come, Fools: One year ago, banks were ridiculed for making so many bad loans. Today, they're being threatened with fines for not making enough.

Earlier this year, the government enacted a $75 billion stimulus program to entice banks to modify mortgages. So far, the program has been a dud. In order to ensure that banks and mortgage servicers are doing their part, the Treasury warned on Monday that those not modifying fast enough "will be subject to consequences which could include monetary penalties and sanctions."

Modify more mortgages, or be fined. Yikes. This is serious business. But why is the program failing so hard that banks and servicers have to be threatened with fines?

First, the numbers. There are two phases to the modification process: the trial modification, where a bank or servicer modifies the loan, and a second step, in which the modification is made permanent. In order to become permanent, borrowers have to make three on-time payments and document their financial condition.

So far, trial modifications have been on fire:

Month

Trial Modifications Granted (cumulative)

May and Prior  

50,130

June

143,276

July

253,673

August

386,865

September

487,081

October

650,994

Source: makinghomesaffordable.gov.

No complaints there. The original goalwas to hit 500,000 trial modifications by early November. Done and done.

Permanent modifications are another story. Data is hard to come by -- the Treasury conveniently leaves out current figures -- but with straight faces, the Treasury and Department of Housing and Urban Development recently predicted that 375,000 trial modifications will be made permanent by year end.

Now here comes the punchline: The Congressional Oversight Panel reports that from March until September, only 1,711 trial modifications were made permanent. Ouch.

Among these 1,711 permanent modifications, just one small servicer, Ocwen Financial Group (NYSE: OCN), claims it alone accounts for 44.6% of the total. Back out Ocwen's percentage, and the rest of the mortgage industry made a nearly insignificant number of trial modifications permanent.

So what, you ask, is tripping up permanent modifications? Let's count the ways:

1. They don't work
The numbers on modification redefaults -- mortgages that fall back into default after being modified -- are atrocious:

Modification Date

30 Days Delinquent, 3 Months after Modification

6 Months after Modification

9 Months after Modification

12 Months after Modification

First Quarter 2008

40.3%

53.6%

60.7%

65.9%

Second Quarter 2008

46.4%

59.0%

63.9%

67.0%

Third Quarter 2008 Continued...