Feds Want Mortgage Writedowns As Part Of Robo-Settlement

Published reports suggest the U.S. Government is close to settling with major banks in the matter of improper foreclosure process, a practice that came to be known as "robo-signing."

The Wall Street Journal quotes people close to the talks as saying the Obama Administration is aiming for a settlement that would require major loan servicers to modify more mortgages, including reducing some principal amounts for borrowers in danger of foreclosure.

The Journal puts the size of the proposed settlement at $20 billion, but CNBC reports the settlement talks have stalled because no one can agree on the size and scope of the settlement.

States took early lead

Besides several federal agencies, a coalition of 50 state attorneys general are also investigating the "robo-scandal" and, presumably, would be party to any settlement. The attorneys general reported progress in their negotiations with the major banks early last month.

"What we're looking at is five separate agreements with the five largest servicers," Iowa Attorney General Tom Miller told Bloomberg News in early January. "We're still a ways away" from reaching agreements, he said. "We're working very hard to figure out what should be in the settlement."

In October, all 50 state attorneys general joined a single investigation of foreclosure practices after details of "robo-signing" and other mortgage company short-cuts began to surface in legal depositions. In 23 states a mortgage company official is required to read all foreclosure documents and sign in the presence of a notary that they have reviewed the documents and the foreclosure is justified.

A number of states quickly began individual investigations of these reports, and in some cases took legal action. On October 6, 2010, Ohio Attorney General Richard Cordray filed suit against GMAC; its parent, Ally Financial Inc.; and one of its employees, Jeffrey Stephan.

Charges of fraud

According to the lawsuit, GMAC and its employees committed fraud on Ohio consumers and Ohio courts by signing and filing at least hundreds and potentially thousands of false affidavits in foreclosure cases. The alleged fraud came to public light after Stephan testified in depositions out of Florida and Maine that he signed thousands of affidavits without personal knowledge or verifying the content.

In late October all the individual investigations were rolled into one, with Miller taking the lead. The Mortgage Foreclosure Multistate Group, comprised of state attorneys general in all 50 states, and state banking and mortgage regulators in more than three dozen states, has been exploring whether individual mortgage servicers have improperly submitted documents in support of foreclosures.

Specifically, the group has investigated whether companies misrepresented on affidavits and other documents that they reviewed and verified supporting foreclosure documentation.  The group is also attempting to determine whether companies also signed affidavits outside the presence of a notary public, along with other possible issues regarding servicing irregularities or abuses.

In its report, the Journal says the Obama Administration is seeking a settlement in which the banks, not the investors who own the mortgages, will have to absorb the costs of writing down some of the principal. Any deal, of course, would have to be approved by all the banks involved. None have commented publicly.