Almost 14% of loan modifications completed in the first quarter of 2010 involved principal reductions of at least 10%, according to the State Foreclosure Prevention Working Group.

But this professional group of state attorneys general and banking regulators believes more and deeper principal reductions are needed considering the decline in house prices and the fact that almost 25% of all homeowners are underwater.

"While payment reduction is now commonplace, the State Working Group (SWG) remains concerned over the absence of loan modifications significantly reducing outstanding loan balances," it said in a new report.

The SWG pointed out that 70% of loan modifications actually result in higher mortgage balances for consumers.

State officials don't expect the new Home Affordable Modification Program or HAMP principal reduction option will have much of an impact, however.

"We believe the optional nature of this alternative and its inapplicability to GSE loans will likely limit the impact," the SWG report said.

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