SAN JOSE -- San Jose city officials say they plan on using the clout of the city's finances to get banks to tow the line on foreclosures.

Mayor Chuck Reed says he wants to reward banks who help financially troubled South Bay homeowners, and punish those that don't.

In an effort to help those struggling to keep their homes, city leaders last week approved a new policy to invest with banks participating in the home affordability modification program.

“We look at safety, liquidity, and yield, but now we're also going to look at whether cooperating with the federal government and these programs,” said Reed. “The message we're trying to send to the banks is why should we do business with you if you're not doing business with us.”

San Jose City Council members Sam Liccardo and Madison Nguyen joined the mayor in proposing the new policy.

“We buy tens of millions of CDs and other instruments every year,” said Liccardo. “So the idea is how do we use that power to create incentives for banks to help our residents who are struggling with their mortgages.”

San Jose is the largest city in the Bay Area with more than a million residents and an estimated 9,000 homes in foreclosure.

A federal program, the Mortgage Loan Modification Program, has shown a limited impact so far providing homeowners with a permanent solution.

According to data from the U.S. Treasury Department released Thursday, there are more than 700,000 trial modifications are underway, which are a short-term fix from banks, but only 31,000 homeowners have been successful in getting a permanent modification.

Poncho Guevara, the executive director of Santa Clara County's largest food pantry, Sacred Heart Community Service , says they are seeing the impact of those displaced with a 40 percent increase this year in food assistance.

“Of that 40% increase, we're assuming about 25% of that increase have been coming from people who formerly owned homes or were displaced because of the mortgage crisis,” said Guevara.

Liccardo says leaders are also working on starting another program to allow homeowners who can't pay their mortgage to rent their home, which could be unveiled early next month.

“We're working with one bank in particular that we hope will result in a pilot project that we can roll out in the coming months,” said Liccardo.

And because of homeowners frustrated with the complicated process of modifying a loan, one Bay Area Realtor says he expects 2010 to be the year of the short sale.