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Consumer Affairs

No Quick Deal to Fix Mortgage Mess

Banks, state AGs meet in Washington, agree they have "a long way to go"

03/31/2011 | By | ConsumerAffairs.com | Finance

photoBig banks and government officials agree on at least one thing: they're not close to reaching agreement on cleaning up mortgage servicing and financing policies. Representatives of the banks and a coalition of state attorneys general met in Washington yesterday to go over a 27-page term sheet put together by the attorneys general and federal officials.

Iowa Attorney General Tom Miller told reporters the two sides have "a long way to go." An Ally Bank spokeswoman called the meeting "useful and productive."

But not to cast too much gloom, Miller said the meeting was about as productive as could be expected and served mostly as an ice-breaker.

The AGs proposal would ban banks from starting foreclosure proceedings while a mortgage modification process is underway. It also wants banks to agree to reduce the principal due on a home mortgage for consumers who meet certain conditions. (Read consumer complaints about mortgage companies).

But the notion of reducing the principal is running into trouble, not only with the banks but with some attorneys general. Four AGs objected to the idea in a joint letter earlier this week, saying that reducing the principal for some homeowners but not others posed a "moral hazard."

Four AGs signed that letter but at least three others are said to be hold-outs on the principal reduction issue. Bloomberg News said Oklahoma Attorney General Scott Pruitt said earlier that any agreement that requires principal reductions is "unacceptable."

Consumer advocates say that reducing the principal for homeowners who are "upside down" -- meaning they owe more on their home than they are worth – would reduce the temptation to default on the loan. But Pruitt and others say it would encourage homeowners to default, hoping to win a principal reduction.

Besides Miller, Delaware Attorney Beau Biden and Associate U.S. Attorney General Thomas Perrelli represented the government officials. Banks represented included Bank of America, Wells Fargo, JPMorgan Chase, Ally Financial and Citigroup.

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