Wells Fargo (WFC) is in talks with the Arizona Department of Housing to join a program providing principal reduction on delinquent mortgages using taxpayer dollars, a source familiar with the negotiations said Wednesday. The program would fall under the $7.6 billion Hardest Hit Fund the Treasury Department disbursed last summer to states most afflicted by the foreclosure crisis. Arizona received $268 million through HHF. Bank of America (BAC) announced in March that it would begin principal reduction for delinquent Arizona homeowners using taxpayers dollars through HHF. It has begun sending out letters to eligible borrowers, targeting roughly 8,000. It will do the same in California as well. JPMorgan Chase (JPM) said it would not be participating in principal writedowns in Arizona, but will launch assistance for the unemployed using HHF in all states that received funding. Principal writedowns continue to remain elusive for homeowners, their advocates and the 50 state attorneys general who continue to negotiate a settlement in the nationwide foreclosure investigation. Laurie Goodman, senior managing director at Amherst Securities, has long said principal forgiveness would be more effective for underwhelming modification initiatives such as the Home Affordable Modification Program. In October, Goodman said a principal reduction effort could “re-equify” roughly 11 million borrowers in imminent default. At the Source Media Mortgage Servicing Conference in Dallas, Peter Mahoney, the managing director of Green Tree Servicing said Wednesday that the AGs might give a little bit on their laundry list of demands if they are able to receive guarantees of principal reduction. “I think they’re holding out for principal writedowns,” Mahoney said. The Wall Street Journal recently reported that the negotiations are coming to a head, and announcement could be made as early as next week. Until then, the only signs of major principal reduction initiatives have come through the Hardest Hit Fund. The Arizona Department of Housing will soon begin reaching out to other major mortgage servicers, but each one wants different tweaks for the program. The state has been flexible, a source said, as long as the company signs up and pledges to help. Write to Jon Prior. Follow him on Twitter @JonAPrior.