Bank Deal May Give States Loan Writedown Options

States may have options for how to use any money from a nationwide foreclosure settlement with U.S. banks, including applying funds toward principal reductions for borrowers, Georgia Attorney General Sam Olens said.

Including those choices may broaden support for any deal among the attorneys general who oppose requiring banks to fund principal writedowns, Olens said in an interview. He estimated that as many as 20 of his colleagues oppose the reductions.

“While one AG may want to use it for principal writedowns, other AGs may use it for different methodologies to assist their constituents,” Olens said today at meeting of state attorneys general in Chicago.

Attorneys general and federal official are negotiating with the five largest mortgage servicers in the U.S., including Bank of America Corp. and JPMorgan Chase & Co., to set standards for the way the banks service loans and conduct foreclosures. Attorneys general from all 50 states began investigating banks’ procedures last year.

In March, state and federal officials proposed settlement terms that called for “a substantial portion” of monetary relief from the banks to fund loan modifications, including principal reductions.

Texas, Florida

At least eight attorneys general, including Olens, Texas Attorney General Greg Abbott, and Florida Attorney General Pam Bondi, have publicly opposed principal writedowns as part of any deal. The March settlement proposal may discourage lending by banks and destroy the housing market, Oklahoma Attorney General Scott Pruitt wrote to Iowa Attorney General Tom Miller, a Democrat who is leading negotiations for the states. Olens, Abbott, Bondi and Pruitt are Republicans.

Geoff Greenwood, Miller’s spokesman, declined to comment about whether officials have discussed a structure that would give states the option of using money to fund principal writedowns.

“Principal reduction is on the table and what form it takes or what it will look like we don’t know because we’re still discussing it,” he said in a phone interview.

State and federal officials have proposed a national fund that would in part fund principal reductions, Greenwood said. Money would also be allocated to states, and they would have discretion for spending funds for “foreclosure-related purposes,” he said. The proposal doesn’t specifically allow states to use the funds for writedowns and doesn’t bar them from doing so either.

‘Work in Progress’

“It’s a work in progress,” Greenwood said.

In an interview at the Chicago meeting, Miller declined to comment about details of the negotiations with the banks. Besides Bank of America and JPMorgan, state and federal officials are also negotiating with Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc.

Miller said he hopes principal reduction will be part of any settlement.

“It’s important to take the time necessary to get the agreement right,” he said. “I think there’s a meaningful chance we will reach an agreement that’s good for the homeowner and good for the housing market.”

Olens said requiring banks to fund principal reductions will prompt some borrowers who are otherwise capable of meeting their loan obligations to stop making payments while waiting for “the panacea,” he said.

“It’s got to be done fairly,” Olens said, acknowledging that many borrowers have lost equity in their homes during the recession. “My house lost 20 percent. I’m not immune.”