As reported by DSNews.com this week, JP Morgan Chase and other lenders are lobbying the Treasury Department to include interest-only periods for mortgages modified under federal guidelines. Interest-only loans are well-known as one of the subprime culprits that sent so many homeowners into default when their payments eventually jumped.

One group of mortgage securities investors says it is frustrated with loan servicers’ lack of sustainable modifications, and argues that these so-called “extend-and-pretend” interest-only restructurings will lead to a delayed round of re-defaults and add to the nation’s already strangling foreclosure problem.

“The Mortgage Investors Coalition is focusing on solutions to re-equitize homeowners,” said Micah Green, a partner at Patton Boggs LLP who represents the coalition.

The coalition was formed in March 2009 by asset managers who currently hold over $100 billion in residential mortgage-backed securities (RMBS), on behalf of pension funds, college endowments, and other investors.

The Mortgage Investors Coalition (MIC) issued a pointed statement Thursday, calling on the Treasury Department to reject banks’ recent proposal on interest-only modifications.

“Modifying homeowners into mortgages that have future payment increases and adjustable interest rates will not improve a homeowner’s situation,” Green said. “Doing so would ignore the fact that many of these homeowners are already in interest-only or other non-traditional mortgages and owe more on their mortgage than their home is currently worth.”

The coalition joins a growing number of economists and analysts who believe that restoring equity through a refinance is the only true way to assist homeowners suffering hardships.

“The Mortgage Investors Coalition believes any changes to HAMP should focus on refinancing homeowners into long-term affordable fixed-rate mortgages,” Green said, “so homeowners and the housing market don’t have the threat of interest rate resets, balloon payments, or large payment shocks in the future that could drive additional foreclosures.”