January 20, 2012 10:55 pm

Talks set out terms of US mortgage deal

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Banks and government negotiators have cleared a big hurdle in efforts to resolve allegations of widespread mortgage-related misdeeds, agreeing on terms for a settlement that are being circulated to the 50 US states for approval, state officials and a bank representative say.

The proposed pact would potentially reduce mortgage balances and monthly payments by more than $25bn for distressed US homeowners, these five people said.

The tentative agreement still must be approved by all 50 state attorneys-general, and negotiators have previously missed proposed deadlines. Participants described the proposal terms as set, meaning the states will be asked either to agree to them or decline to participate.

The amount of potential aid is contingent on state participation and would decrease significantly if big states do not sign the agreement. New York and California are among several states that have voiced concerns about the terms of the proposed deal with Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial. New York and California are particularly concerned with the part of the deal that would absolve the banks of civil liability for allegedly illegal mortgage-related conduct.

California borrowers would be eligible to receive more than $10bn in aid if the state were to agree to the terms, according to several people involved in the talks.

The US Department of Housing and Urban Development declined to comment.

Members of the Obama administration and a small group of state officials who negotiated the settlement terms are set to pitch the deal to Democratic state attorneys-general on Monday in Chicago. A conference call with Republican state prosecutors is scheduled for Monday night.

The banks have been accused of seizing borrowers’ homes without proper documentation and of systematically filing fraudulent documents in courts around the country, in addition to abusing borrowers through deceptive practices in violation of state laws and federal rules. Bank of America said it continues to pursue a settlement. The other banks either declined to comment or did not respond to requests for comment.

State prosecutors have already received a set of documents detailing new mortgage servicing standards that the banks and the government negotiators have agreed to. The states were also being sent documents detailing other main components of the deal, such as the liability release for the banks, the so-called “menu” of options describing the various forms of aid to be given to borrowers, as well as the precise language of the so-called “most favoured nation” clause, which spells out how participating states in the deal would be eligible to receive more advantageous terms should a holdout state strike a more favourable deal on its own with the five targeted banks.

Eric Schneiderman, New York attorney-general, has long expressed reservations about the scope of the liability release. Kamala Harris, California’s legal officer, left the negotiations in September after calling the proposed settlement “inadequate”. The Obama administration has been pressing both to sign up to a final deal, people familiar with the matter have said.

Some Republican state legal officers voiced displeasure last year with the terms under discussion.

Several states want banks to pay more in return for the waiving of liability, citing allegedly pervasive wrongdoing .

The nation’s five largest mortgage firms – BofA, JPMorgan, Wells Fargo, Citigroup and Ally – saved more than $20bn since the housing crisis began in 2007 by taking short-cuts in processing troubled borrowers’ home loans, according to a presentation prepared for state attorneys-general last year by the US Consumer Financial Protection Bureau.

US households with negative equity collectively owe their lenders about $700bn more than their homes are worth, according to CoreLogic, a real estate research firm.

The settlement figure – $25bn if all 50 states participate – would swell to about $30bn if other banks also joined the deal. Negotiators have said they intend to target nine other leading US banks who last April signed consent orders with federal bank regulators for alleged foreclosure-related wrongdoing.

US Bancorp and PNC Financial Services have set aside reserves for such an outcome.

The proposed settlement is structured as a three-year system, under which banks would receive credit toward a target dollar amount by restructuring mortgages held on their own books or owned by investors through mortgage-backed securities (that do not involve government guarantees).

The banks would receive less credit if they reduce balances for loans packaged in bonds or by reducing monthly payments through cuts in borrowers’ interest rates. In one scenario, the banks would get about 50 cents of credit for every $1 of reduced mortgage principal in home loans used to back bonds. In another scenario, balances on loans held on the banks’ books that are cut in the first year of the deal would receive $1.25 credit. This means, under certain circumstances, the aid to homeowners would be less than the aggregate size of the settlement, people familiar with the matter said.

Investors in US home mortgage bonds may have to swallow significant losses as part of the deal, people familiar with the matter have said. Sherrod Brown, an Ohio Democratic senator, sent a letter to negotiators this week urging them not to allow the banks to pass on the cost of the settlement to pension funds and other investors.

The Obama administration has long sought a settlement, which would provide relief to troubled borrowers that previous administration initiatives failed to accomplish as well as legal certainty for banks pursuing home repossessions.

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