States and Servicers Consider New Proposal for Aiding Those Underwater

Help for underwater homeowners has moved from principal writedowns to refinancing in the settlement negotiations between state attorneys general and the nation's five largest mortgage servicers.

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According to a widely circulated ""_Wall Street Journal_ report"":http://online.wsj.com/article_email/SB10001424052970204346104576637513972299854-lMyQjAxMTAxMDEwODExNDgyWj.html?mod=wsj_share_email_bot, the proposal was put on the table at a meeting last week between representatives from both sides.

DSNews.com has received confirmation from a source involved in the negotiations that the parties are indeed considering a proposal to incorporate refinancing for underwater homeowners into an agreement to settle allegations of robo-signing and improper foreclosure practices.

While the _Journal_ concedes that discussions are ongoing and ""any final outcome is uncertain,"" reporters Nick Timiraos, Ruth Simon, and Dan Fitzpatrick lay out the framework for who would qualify for such assistance.

Borrowers who are current on their mortgage payments but unable to take out a new loan due to the equity constraints of a typical refinance would fit the bill.

The main caveat is that the borrower’s loan must be owned directly by one of the five banks involved in the

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settlement talks â€" Bank of America, Citigroup, Ally’s GMAC, JPMorgan Chase, or Wells Fargo â€" and not have been packaged into a mortgage-backed security and resold.

The impact of such a proposal would be limited, considering some 80 percent of mortgages are securitized and owned by investors.

While the agreement between states and servicers is intended to settle allegations of wrongful foreclosures and faulty paperwork, early on in the negotiations, attorneys general were demanding mortgage relief also be extended to underwater borrowers in the form of principal-reducing loan modifications.

Principal writedowns became a key sticking point for the settlement talks with even some attorneys general openly expressing their reservations about the moral hazard such a move might carry.

Officials are hoping to advance negotiations with a refinancing compromise, which also could be leveraged to win back the support of those attorneys general who have dropped out of the discussions, such as California Attorney General Kamala Harris.

Harris excused herself from the negotiations late last month, calling the settlement proposal at that time “inadequate” for homeowners in her state â€" a state where the dive in home prices has left millions underwater.

Litigation liability has also been a stumbling block in reaching an agreement. The banks want some sort of assurance that the settlement will protect them from future litigation, but some AGs say any joint agreement should not prevent them from pursuing their own actions.

Geoff Greenwood, a spokesperson for the states' lead negotiator, Iowa Attorney General Tom Miller, told DSNews.com, “It’s hard to say exactly how close we are. We’re getting closer and we’re cautiously optimistic we’ll reach an agreement in principle.”