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Servicers write down principal on nearly 5,000 HAMP modifications

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Mortgage servicers included a principal writedown on 4,911 active workouts through the Home Affordable Modification Program since the fall of last year, the Treasury Department said Friday. The Treasury launched HAMP in March 2009 to provide an incentive to servicers for the modification of loans on the verge of foreclosure. Through May, participating servicers started more than 731,000 permanent modifications and began 1.6 million trials. Servicers completed 32,000 permanent modifications in May, up 11% from the previous month. In October, the Treasury launched the Principal Reduction Alternative, requiring servicers participating in HAMP to evaluate borrowers with a loan-to-value ratio of more than 115% for a principal writedown. Servicers started more than 21,000 trials with a principal writedown attached. More than 16,000 trials are  active. According to the Treasury, borrowers in the principal reduction alternative received a median $69,532 reduction on their permanent modification, or a 32.2% writedown from the unpaid principal balance before the modification. However, the government-sponsored enterprises do not participate in the principal writedown initiative for loans they own or guarantee. Fannie Mae and Freddie Mac executives told attendees at a HousingWire conference in May that principal reduction was not part of their plans. Major servicers have been reluctant to write down principal without taxpayer dollars. Ally Financial (GJM) and Bank of America (BAC) agreed to principal reduction programs through state Hardest Hit Fund programs. Wells Fargo (WFC) is in talks with the Arizona Department of Housing to do the same. But representatives at these banks maintain the writedowns will only come on the mortgages they own and at the discretion of their investor. As for HAMP, the Treasury said it cannot require such an action under existing contracts with the servicers. "Servicers and investors do receive incentives for reducing principal. PRA requires servicers to 'do the math' to prompt them to think about when principal reduction may make sense for their customers to prevent avoidable foreclosures," a Treasury spokesperson said. Write to Jon Prior. Follow him on Twitter @JonAPrior.

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