Mortgage servicers will not be able to use principal reduction tax dollars under the Home Affordable Modification Program as "credits" toward the foreclosure settlement with the attorneys general, a Treasury official said.

The top five servicers struck a $25 billion settlement in recent weeks with 49 state attorneys general and federal agencies over past foreclosure abuses. In the deal, $17 billion will be used as "credits" toward writing down or forbearing principal on roughly 1 million loans mainly held in the bank servicing portfolios.

Not every dollar the servicers reduce from the principal will be "credited" from the $17 billion the banks agreed to. For every dollar forgiven, roughly 50 cents or less will be credited under the $17 billion number. Officials said the settlement would ultimately result in an estimated $45 billion in total principal reductions.

But details of the settlement are still being worked out and officials expect to file the documents in court this month.

Roughly one week before the settlement, the Treasury said it would triple the amount of payments to investors who allow principal reduction on HAMP modifications.

Concerns arose that servicers would be able to write down principal under HAMP, simultaneously receive taxpayer dollars under the program and get "credit" under the AG settlement.

"There is no way that we would allow federal dollars used for HAMP principal reduction or Hardest Hit Fund programs to be used for servicer credit under the settlement," said Darius Kingsley, chief of homeownership preservation office at the Treasury, in an interview with HousingWire.

A servicer can apply for incentive payments under the HAMP principal reduction program, but they cannot put that same incentive toward credit under the AG settlement.

The servicer could receive 50 cents on the dollar back for principal reduction under the HAMP changes from the Treasury, Kingsley said, but it could only apply the other 50 cents of the write down to the AG settlement credit system, not the full dollar.

Kingsley provided an example.

Say a servicer has two loans that need principal reduction of $100 each, and the servicer needs to achieve $100 worth of settlement principal reduction credit. It could choose to reduce the principal enough on one loan for $100, but not count it as a HAMP-PRA modification. The servicer will not receive any incentives from Treasury; but only one loan would benefit from principal reduction.

Or the servicer can reduce both loans for $100, and count them both as HAMP-PRA loans. The servicer will have written down $200 in principal reduction, and received from the Treasury $100 in incentives; the servicer still counts $100 in settlement credit, because that's what they are out-of-pocket. But both borrowers will have benefitted, not just one.

Not all forms of principal reduction in HAMP can qualify for incentives. Through the program, a borrower can earn principal reduction over three years.

Roughly 40,300 modifications included principal reduction under HAMP through December, according to Treasury data.

"Structuring the AG settlement credits this way makes it more of an additive for principal reduction," Kingsley said. "This way, more borrowers could potentially receive some form of reduced principal."

At the Mortgage Bankers Association servicing conference in Orlando, Fla., Wednesday, Kingsley said there is "compelling evidence" the principal reduction changes to HAMP would keep more borrowers out of foreclosure.

"While servicers can apply principal reduction activity under HAMP toward the settlement, they cannot apply any investor incentives they receive under these programs towards their settlement obligations," Kingsley reiterated at the conference.