The servicing settlement being negotiated between state attorneys general and major banks will likely require principal reduction via loan modifications and possibly refinances. Principal reduction, however, will likely only be required for certain mortgages held in bank portfolios. The Federal Housing Finance Agency has refused to allow principal reduction on mortgages serviced for the government-sponsored enterprises. Non-agency mortgage-backed security investors, meanwhile, have been more accepting of principal reduction of late but the vast majority of such mod activity is already concentrated on portfolio loans. ...