Shahien Nasiripour of Huffington Post

Leading Mortgage Firms May Be Forced To Reduce

Loan Balances For Distressed Homeowners

First Posted: 05/10/11 08:18 PM ET Updated: 05/10/11 08:30 PM ET

  Bank Of America ,   Foreclosure Crisis ,   Mortgage Crisis ,   Citigroup , Ally Financial , JP Morgan Chase ,
John Suthers , Rob McKenna , Wells Fargo , Attorneys General Foreclosure Crisis , Attorneys General
Mortgage Crisis , Big Banks Foreclosure Crisis , Distressed Homeowners , Loan Modifications , Mortgage
Defaults , Business News

The nation's five largest mortgage firms may be forced to reduce loan balances for distressed
homeowners as part of an agreement with state attorneys general and the Obama administration to
settle claims of faulty mortgage practices, a top state official involved in the negotiations said Tuesday.
The proposal is part of a set of remedies banks would have to agree to in order to settle the state and
federal probes launched last autumn, which found that the largest mortgage firms illegally seized the
homes of at least dozens of borrowers and engaged in shoddy practices that short-changed troubled
borrowers.
Mortgage principal reductions would comprise part of a larger fine levied on Bank of America, JPMorgan
Chase, Citigroup, Wells Fargo and Ally Financial. Penalties could reach $30 billion, officials said.
The forced reduction of mortgage principal as a penalty against flawed past practices has proven
contentious. Some Republican attorneys general have objected, as have some Republican members of
Congress.
On Tuesday, however, a state official told The Huffington Post on condition of anonymity that the option
"very much remains on the table."
While officials have not determined how much would be exacted from the banks -- and specific dollar
amounts to settle the probes have not yet been discussed between the state and federal governments
and the banks -- the proposal to compel financial firms to cut loan balances is part of one of two
documents circulated Tuesday at a hotel in northern Virginia, where bankers, state officials and policy
makers from the Obama administration began a three-day meeting.
The targeted banks have argued vociferously, both in private discussions and in public, that they
opposed cutting distressed homeowners' principal balances.

During meetings two weeks ago, representatives from such banks conducted a presentation which they
claimed illustrated that mandating principal reductions would not prevent a significant number of new
foreclosures and would be harmful to the general economy.
The banks said "it would trigger a stampede of strategic defaults," an official familiar with one of the two
discussions said at the time, referring to instances in which borrowers who can afford to make good on
their obligations choose not to. Strategic defaults are much more common in the business world than
among homeowners, according to experts who study the issue. Homeowners generally feel a moral
obligation to continue making their payments, whereas corporations view the breaking of contracts as
pure business decisions.
Government officials questioned the banks' assumptions and fought back against their claims.
The other document circulated Tuesday outlines standards that mortgage firms would have to adhere to
for current and future borrowers, like forcing banks to ensure they have the right documentation when
they move to repossess homes. The document was revised from an earlier draft first circulated in early
March, The Huffington Post reported last week.
The standards are a response to investigations launched last fall after the nation's largest lenders
voluntarily halted home seizures when faulty document practices -- like so-called "robo-signing" -- came
to light, erupting into a nationwide scandal. Currently, no national standards govern how mortgage firms
should treat borrowers who fall behind on their payments or default on their obligations. Congress has
taken up the matter, and officials generally agree on how mortgage firms should treat borrowers.
Tuesday's bipartisan meeting included the Washington Attorney General Rob McKenna (R) and Colorado
Attorney General John Suthers (R), who called in remotely. Top officials from Florida's and Texas'
attorney general offices, both led by Republicans, attended, along with the Democratic attorneys general
from Delaware, Iowa, Illinois, North Carolina and Connecticut.
Top officials from the Treasury Department, Department of Justice and the Department of Housing and
Urban Development were also present.