March 6, 2011 in Business

Government, banks wrestle over botched foreclosure settlements

Jim Puzzanghera Los Angeles Times
 

WASHINGTON — Federal and state officials are analyzing proposals that could help people who lost their homes or missed mortgage payments as a key part in resolving a multibillion-dollar case over botched foreclosure paperwork.

Government negotiators are wrestling with banks and their mortgaging servicing arms over the amount of the settlement — from $5 billion to $20 billion — and then must decide how best to use the money.

“We are getting close to a critical phase of negotiations,” said Geoff Greenwood, spokesman for Iowa Attorney General Tom Miller, who is leading attorneys general from all 50 states in investigating mortgage foreclosure problems. “We’ve finalized nothing, and we’re still working on some very complicated issues.”

One of the most delicate issues is determining how to aid homeowners without further damaging the housing market.

Should the money, for instance, go only to people whose mortgages were directly affected by faulty robo-signed documents — those signed without being reviewed by anyone — or should it should be spread broadly to all troubled homeowners in recognition of the harm caused to the entire housing market?

Under one proposal, people who already have lost their homes could get cash payments or access to new mortgages at special low rates, according to two government officials familiar with the talks but who requested their names not be used because a deal hasn’t been struck yet.

Another proposal, they said, would force major servicers, including Bank of America Corp. and Wells Fargo & Co., to provide a total of $20 billion to reduce principal on troubled mortgages — and eat the costs, not pass them on to mortgage investors.

Rep. Maxine Waters, D-Calif., said $20 billion for principal write-downs was not enough money, given the scope of the problem. At the end of September, the total amount of negative equity — how much borrowers nationwide were underwater — was $744 billion, according to real estate research firm CoreLogic.

“This settlement is too small and will likely have one of two results: Either borrowers will receive insignificant principal reductions, or reductions will only be available to a small subset of troubled borrowers,” Waters said.

But others contend writing down principal could cause more problems by encouraging homeowners to stop making their monthly payments, hoping to score a reduction in what they owe.

“The magic wand is principal reduction … but to what extent does it encourage people to stop paying?” said Bert Ely, an independent banking analyst. Some banks might balk at such a requirement, he said.

One proposal to deter homeowners from intentionally missing payments, one government official involved in the talks said, would make principal reductions available without requiring that mortgages be in default.

Competing agendas of different government agencies and potential pushback from mortgage servicers could force separate settlements and delay an overall resolution more than a month, the officials said. Otherwise, a broad settlement would be reached within weeks, they said.

Because foreclosure laws vary, state officials are taking a leading role in the negotiations. But Washington is also important because the four largest servicers, which dominate the market, are national banks that are overseen by federal regulators.

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