* Geithner-Donovan: System is "broken, should be fixed"

* Servicers now have little incentive to rework loans

(adds Geithner-Donovan statement, background)

By Corbett B. Daly

WASHINGTON (Reuters) - The Obama administration Tuesday stepped up efforts to make it easier for struggling homeowners to renegotiate the terms of their mortgage, although it could be more than a year before such efforts pay off.

The way mortgage servicers -- firms that collect loan payments on behalf of a loan's owner -- are paid is fundamentally "broken and should be fixed," Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan said in a joint statement.

Geithner and Donovan's comments followed news the regulator for mortgage finance giants Fannie Mae and Freddie Mac said it would consider new ways for mortgage servicers to be compensated in order to make it easier to modify loan terms for struggling homeowners.

The existing system for mortgage servicers provides little flexibility to change easily the terms of the loan if a borrower falls behind on monthly payments.

"The current model has not motivated mortgage servicers to invest the time, effort and resources needed to fully explore all options to help delinquent borrowers avoid foreclosure," Donovan and Geithner said, echoing the Federal Housing Finance Agency.

As it now stands, servicers are paid a monthly fee for collecting payments on performing loans. When those loans go bad, the monthly fees decline, giving the servicer little incentive to make an effort to communicate with the borrower, let alone work out new terms for the borrower, a time-consuming and costly process.

Critics have said this compensation structure is a key reason the number of loans modified for struggling borrowers has been relatively modest.

The Federal Housing Finance Agency said it is seeking input from industry, consumer groups, investors and other government agencies for ideas on how to change the system. Changes to the system are not expected to take place before the middle of next year, the agency said.

Just more than 500,000 borrowers have thus far received a permanent loan modification under the Home Affordable Modification Program, which is the administration's signature foreclosure prevention effort.

Banks seized more than 1 million U.S. homes in one year for the first time in 2010 as millions of home loans went bad amid high unemployment and a severe housing slump.

(Reporting by Corbett B. Daly; Editing by David Storey and Bill Trott)