WASHINGTON — The Obama administration plans to announce Friday that it is revamping its foreclosure prevention plan to encourage lenders to offer principal write downs to troubled borrowers.

Until now, the Home Affordable Mortgage Program has mainly focused on lowering a borrower's payment through interest rate reductions, a tactic critics have said does not address borrowers who owe more on their mortgage than their home is worth. One lender, Bank of America Corp. [BAC], already announced this week that it would agree to write down the principal of a limited pool of troubled loans.

"As part of its ongoing commitment to continuously improve housing relief efforts, the administration will announce adjustments to the Home Affordable Modification Program and to the Federal Housing Administration programs tomorrow," said an administration official, speaking on condition of anonymity. "These program adjustments will expand flexibility for mortgage servicers and originators to assist more unemployed homeowners and to help more people who owe more on their mortgagee than their home is worth because their local markets saw large declines in home values. These changes will help the administration meet its goal of stabilizing housing markets by helping more Americans stay in their homes."

As part of the administration's Hamp program, servicers will be required to consider principal write downs for certain eligible borrowers. To encourage lenders to embrace that option, the administration will provide incentives to servicers if the loan performs over three years. Second lien-holders will get more incentives to write down principal.

The administration will also address the growing number of unemployed homeowners by offering a three-month forbearance plan.

The changes also include a revamp of Federal Housing Administration guidelines to allow non-FHA borrowers to refinance into FHA-guaranteed loans. Under the plan, first lien holders must first write down the mortgage to 100% of its current appraised value. The FHA program would allow a maximum loan to value ratio of 115% in order to help capture some second liens, and allow borrowers' FICO scores to be as low as 500.

Troubled Asset Relief Program funds will be used to provide the incentives to borrowers and servicers. The previous Hamp funds were used to incentivize reducing the monthly payments to 31% of the debt to income of the borrower.

As of the end of February, servicers had extended only 170,207 permanent modifications. Of those, all included an interest rate reduction, 40.8% included a term extension and only 27.8% included principal reduction.

Sources said the new program may not be operational until September.