WASHINGTON ( TheStreet) -- Bank of America ( BAC) has the potential to earn $10 billion worth of incentives for modifying mortgages through a federal program, but appears to have capitalized upon as little as 1% of that amount through January.

The situation at Bank of America, the country's largest mortgage lender, is emblematic of the banking industry's sluggishness in accepting the inevitable about the U.S. housing mess. Borrowers need loans that are more affordable, or else they won't be able to pay. There's also a glut of housing inventory that needs to be cleared.

The government has been trying to push the process forward, simultaneously offering carrots while trying to smack the banks with sticks, but the process has been slow-going at best.

The Treasury Department has set aside $75 billion in incentive payments for its Home Affordable Modification Program, or HAMP, to be distributed to banks and borrowers. Last week, it unveiled another program to encourage "short sales" of homes that are occupied by borrowers at risk of foreclosure. The government will pay servicers up to $2,000 to get it over with and sell the home at a loss and provide "relocation assistance" for borrowers as well.

But not every servicer has enrolled in HAMP, and even those that have are leaving billions in potential incentive payments on the table.

The "incentive cap" figure -- or the maximum potential rewards for participating servicers -- stood at $36.9 billion at the end of January, according to a monthly report. TheStreet.com asked a Treasury spokeswoman how much of those funds have actually been dispersed, but she didn't respond in time for publication.

Of the 106 servicers participating in HAMP, the three banks that stand to reap the biggest incentives -- Bank of America, Wells Fargo ( WFC) and JPMorgan Chase ( JPM) -- account for more than half of potential HAMP rewards. To receive those funds, the banks would have to successfully move borrowers from a trial plan into a permanent mortgage workout. However, only 2.2% of their 1.9 million eligible borrowers have advanced to that level. Another 2.1% -- 40,000 or so -- have received permanent workout offers, but haven't accepted them yet.

>>>Click here to see the breakdown of banks that could earn the most in HAMP incentive programs.

Those figures imply that of the $19.3 billion that Bank of America, Wells Fargo and JPMorgan are eligible to receive from HAMP, they may have only collected as little as $425 million.

The math isn't clear-cut because the Treasury is offering cash for other types of mortgage breaks, but those delinquent-borrower workouts make up the bulk of HAMP. The federal government splits the cost of reducing monthly mortgage payments, along with a $1,000 bonus for each permanent modification, and $1,000 for each of the next three years, if the borrower stays current.

The reward is even more enticing for banks that offer workout plans to borrowers who are current, but at risk of falling behind: $2,000 split among the lender, servicer and investors. Additionally, the Treasury will provide unspecified incentives for extinguishing second-lien mortgages as part of an overall workout plan.

The government has been pressuring big banks to take part in the program by publicly releasing performance statistics, and prodding them to speed modifications along more quickly.

Depending on one's viewpoint, the data are either encouraging, perplexing or angering. Though it's taken some time, big banks seem to have finally gotten the hint, redoubling efforts to move more eligible borrowers into trial mods, and more trial mods into permanent solutions. If those borrowers were going to need a modification anyway, or if the home was going to be sold at a loss, the bank, its investors and borrowers might as well take advantage of government incentives to do so.

Anti-bailout taxpayers, on the other hand, may see the situation differently. They're sharing losses on bad loans they didn't make or support. The irresponsible lenders and borrowers who are party to the loans stand to accrue tens of billions of dollars, simply to come to the table and figure out a workable solution.

OneWest Bank may be the most egregious case of taxpayers bearing the burden of bad bank debt. The bank was formed after the failure of IndyMac, when private equity players acquired its assets from the Federal Deposit Insurance Corp.at a relative bargain, with a generous loss-sharing agreement on bad loans. OneWest now stands to earn up to $2.2 billion for participating in HAMP as well.

Nonetheless, the program is in place, and the government's efforts appear to be gaining traction. For instance, Bank of America nearly quadrupled its permanent mods in January, to 12,761, and had another 13,701 of them awaiting acceptance from borrowers. It also became the first servicer to enroll in HAMP's second-lien program, and named an executive to oversee short sales in early February.

Of the large servicers, GMAC Mortgage has shown the best performance, with 17% of eligible borrowers now in permanent modifications, and another 2% pending. Bank of America, Wells Fargo, JPMorgan, Citigroup ( C) have lagged in comparison -- all of their permanent modifications stand at 4% or less of eligible borrowers -- but they have ramped up performance in recent months.
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What may be even more telling is that dozens of tiny servicers across the country have seen their incentive caps surge in recent months -- an indication that they are working to help more borrowers than initially estimated. Based on updated loan portfolio data, the incentive cap for Chicago-based Shore Bank climbed from $2.3 million to $3.56 million between September and January. The cap for Mentor, Ohio-based Lake National Bank rose from $250,000 to $380,000. Purdue Employees Federal Credit Union, which serves students, faculty and staff of Indiana's Purdue University, saw its limit climb from $1 million to $2.3 million.

As the program progresses, and the reckoning on mortgage debt continues to come to pass, more troubled homeowners will be helped, at servicers large and small. And the billions of dollars available to be dispensed by the Treasury Department seem to finally be moving the process along at a faster pace.

-- Written by Lauren Tara LaCapra in New York.

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