March 4, 2011 / 10:58 PM / 7 years ago

UPDATE 1-Mortgage writedown proposal advances in U.S. probe

* Principal reductions part of settlement proposal

* Bank fines still being negotiated (Adds comments from Iowa AG’s office)

By Corbett B. Daly and Dave Clarke

WASHINGTON, March 4 (Reuters) - U.S. banks have been asked to forgive some of the amount owed on troubled mortgages in a proposal sent to them by state attorneys general and federal agencies on Thursday.

The 27-page proposal is part of a broader effort to get banks to agree to a settlement after they were accused last year of taking possibly illegal shortcuts in some foreclosure proceedings.

Banks were accused of using “robo-signers” to sign hundreds of unread documents a day and maintaining sloppy mortgage paperwork.

“What we envision is a set of requirements for how they service loans and handle foreclosures,” said Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller.

Miller is spearheading the 50-state attorneys general probe into mortgage lenders’ foreclosure practices.

Greenwood said the states plan to meet face to face with banks this month to hash out a deal.

U.S. regulators and a coalition of state attorneys general are negotiating a settlement over the servicing problems with the biggest mortgage lenders, including Bank of America Corp (BAC.N), JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N).

Federal agencies and the states have said they want a single, comprehensive deal with the banks rather than a smorgasbord of separate deals.

Whether that will happen is questionable.

    The banking regulators involved in the negotiations were not part of the proposal sent Thursday.

    That proposal includes practices servicers would have to follow when foreclosing on properties but does not include a fine they also would have to pay, a matter that is currently being negotiated separately.

    The proposal would encourage servicers to do principal writedowns to keep borrowers in their homes and provide a single point of contact for borrowers in foreclosure proceedings, according to Greenwood and another source familiar with the plan.

    Greenwood said the proposal has the support of the U.S. Housing and Urban Development Department, the Justice Department, the Federal Trade Commission and Treasury Department staff setting up the Consumer Financial Protection Bureau.

    “These are terms that we who have signed onto these documents have agreed to,” Greenwood said.

    The federal agencies are working with banking regulators, the Office of the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corp, to craft a broader settlement that would include fines on the banks but there are disagreements over the size of the penalty, according to people involved in the negotiations.

    The news of the 27-page proposal being sent was first reported by the Wall Street Journal. (Reporting by Corbett B. Daly and Dave Clarke, Editing by Tim Dobbyn and Matthew Lewis)

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