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Some Fannie Mae and Freddie Mac borrowers could see their mortgages shrunk through principal reduction, as California makes an effort towards getting more homeowners into a foreclosure prevention program.

State officials are now dropping a requirement that banks match taxpayers’ funds when homeowners receive mortgage reductions through the program. By eliminating this requirement, it is hoped that it will make it easier for homeowners to get principal reductions.

Participation by Fannie Mae and Freddie Mac could prove a major boost to Keep Your Home California. According to the state attorney general, together they account for about 62% of outstanding mortgages in the state.

The nation’s five largest banks agreed to reduce the principal on some of the loans they own, terms to a $25 billion mortgage settlement that occurred this year.

Fannie and Freddie argue that “shrinking the mortgages of underwater borrowers would boost the housing market by giving homeowners a clear incentive to keep paying off their loans.” The two also feel that principal reduction would reduce foreclosures, lowering monthly payments and give homeowners hope to one day have more equity in their homes.

The state will allocate the federal money, resulting in help for fewer California borrowers than the 25,135 that was originally proposed. The $2 billion program is run by the California Housing Finance Agency, with $790 million available for principal reductions. Financial institutions will be required to make other modifications to loans, such as reducing interest rates or changing the terms to the loans.

The changes are to be implemented some time in early June. The agency will increase the amount of aid borrowers can receive from $50,000 to $100,000.

Up to this date Bank of America has been the only major servicer participating in the principal reduction component of the program.