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Sources: Banks Looking to Settle Fed and State Claims Over Mortgage-Servicing Practices

Source: WSJ -

Posted on 11 May 2011

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People familiar with the situation say that the nation's biggest banks are willing to pay as much as $5 billion to settle claims by federal and state officials of improper mortgage-servicing practices.

This is considerably less than the amounts sought by state and federal officials, some of whom are asking for more than $20 billion in penalties. The banks' figure comes as mortgage companies and state and federal officials continue their efforts to strike a settlement of investigations sparked by allegations of "robo-signing" and other questionable foreclosure practices that came to light last fall.

Bank representatives met Tuesday with state and federal officials in the latest round of negotiations. On Friday, banks received revised term sheets from government negotiators. One sheet revised proposed changes in mortgage-servicing practices. The second term sheet governs how penalties would be allocated; among other things, it details how they would have to reduce loan balances for certain borrowers.

"It sets forth a structure that establishes how funds would be disbursed both on the state and federal levels," said a spokesman for Iowa Attorney General Tom Miller.

The size of the penalties is a key point of contention as banks and state and federal officials try to hammer out a deal. Government officials haven't yet settled on a specific dollar figure, but they are set to begin discussions with banks on how those penalties would be applied, according to people familiar with the matter.

Banks also are opposed to any broad-based write-down of principal balances, saying it will provide an incentive for borrowers to default.

The banks intend to propose that as much as $5 billion be used to compensate any borrowers previously wronged in the foreclosure process and provide transition assistance for borrowers who are ousted from their homes, according to people familiar with the matter. One idea is that foreclosed borrowers could receive several months of free rent once they find new housing, one of these people said.

All sides want a settlement to resolve widespread breakdowns in foreclosure procedures but any agreement must satisfy an unwieldy mix of parties, including state attorneys general, the Federal Trade Commission and the Department of Housing and Urban Development.

They must also reach an agreement on the claims state officials and federal regulators will surrender as part of any settlement. Banks are less likely to sign off on any deal that doesn't provide a broad release of claims from state attorneys general in the most populous states.

In April, bank regulators sent 14 institutions orders that required the banks to improve foreclosure practices but didn't include fines. Banks have 60 days to set up plans that would clean up their mortgage-servicing processes. They also have to hire an independent third-party consultant that will examine all foreclosure cases in 2009 and 2010 for any errors.