American Home Mortgage Servicing has reached a settlement with the State of Massachusetts, agreeing to modify 8,200 mortgages held by Massachusetts homeowners.

The firm had previously been blocked by a state court from foreclosing on the mortgages, originated by H&R Block Mortgage and Option One Mortgage. The mortgages were the subject of a lawsuit last year by Massachusetts Attorney General Martha Coakley.

The suit alleged Option One and H&R Block Mortgage originated the risky subprime loans with reckless disregard for whether borrowers would be able to afford their loan payments -- a practice that has contributed significantly to the foreclosure crisis in Massachusetts, Coakley says. Under the agreement, filed in Suffolk Superior Court, AHMSI will be required to provide affordable loan modifications to certain borrowers who fall behind in their mortgage payments.

The Attorney General's litigation with Option One, H&R Block Mortgage, Block Financial Corp., and their parent company, H&R Block, Inc., is ongoing, and is expected to go to trial in 2010. The lawsuit is seeking redress for the damage incurred by homeowners and Massachusetts communities as a result of the unfair and deceptive lending practices of the defendants. The lawsuit also alleges civil rights violations because the defendants' policies and practices resulted in discriminatory pricing to the detriment of black and Hispanic borrowers; disparate pricing violates antidiscrimination laws.

In April 2008, AHMSI purchased the right to service the Option One and H&R Block Mortgage loans. As a result, AHMSI was named as a defendant in the office's ongoing enforcement action, and became subject to certain obligations under a preliminary injunction issued by the Suffolk Superior Court in November 2008, which limited the defendant's ability to foreclose on the loans originated by Option One and H&R Block Mortgage. The Attorney General's complaint did not allege loan origination misconduct by AHMSI, and the company cooperated with the Attorney General in reaching this agreement.

"Our office continues to work to protect homeowners from the fallout of the subprime lending crisis in Massachusetts, and to assist those homeowners who fell victim to unfair and deceptive lending practices to stay in their homes," Coakley said. "Our agreement with AHMSI is another step toward that goal, and it will provide much-needed relief to thousands of homeowners. As I said in testimony to Congress earlier this year, I believe that loan modifications are key to stemming the tide of foreclosures in our state and across the nation."

The agreement provides that borrowers holding Option One and H&R Block Mortgage loans now serviced by AHMSI will receive a number of significant benefits, including:

• Loan modifications for eligible borrowers who are unable to make their scheduled payment and are more than 45 days past due in their mortgage payments. AHMSI will modify those loans through a variety of steps to provide borrowers affordable monthly mortgage payments. The steps include reduced interest rates, extended amortization periods, and, if necessary, principal forbearances.

• Relocation payments of $3,000 to $7,500 for delinquent borrowers who do not qualify for loan modifications, and alternatives to foreclosure, such as deeds-in-lieu of foreclosure.

• Opportunities for the Attorney General's Office to object to foreclosures and denials of loan modifications, including a requirement that AHMSI obtain court approval to foreclose upon a loan where AHMSI and the Attorney General's Office cannot resolve an objection.