Mandatory Principal Reductions in Bank Foreclosure Settlement

Several state Attorney Generals do not believe that mandatory loan/mortgage principal reductions are the way to go while many attorney generals involved in the negotiations around the “bank settlement” that lenders, politicians and homeowners alike hope will resolve much of the fallout from last fall’s robo-signer debacle think that forcing loan reductions on banks could be a good thing. The AGs from Virginia, Texas, Florida and South Carolina sent a letter yesterday to Tom Miller, who is spearheading the AG facet of the efforts, arguing that loan assistance is “largely unrelated to the foreclosure document issue.” The group believes that the settlement should deal with changes in bank behaviors that were involved in the debacle rather than targeting loan modification proposals and asserted that the public focus on principal reductions actually made the settlement more likely to perpetuate the problem behaviors by essentially ignoring “the unacceptable and unlawful practices that were widespread within the nation’s largest mortgage servicers.”

Furthermore, the group proposed the idea that the deal could actually “foster a moral hazard” by rewarding homeowners who “simply choose not to pay their mortgage”. A number of republicans in the House of Representatives have also criticized the proposal, but all agree that some settlement must be reached in order to cultivate a recovery in the lending and real estate markets.