The largest US mortgage servicers will meet federal and state officials in Washington on Friday to try to reach a settlement over allegations that the banks broke federal rules and state laws in their treatment of distressed borrowers.
But the meeting is clouded by continued squabbling between the states as to the size and scope of penalties to be paid by the banks for their alleged failings in processing foreclosures.
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The Illinois attorney-general estimated that in a final accord, Bank of America would pay $7.8bn, more than Wells Fargo and JPMorgan Chase combined, according to an internal document prepared by the state described to the Financial Times.
JPMorgan would pay $3.8bn, while Wells could pay about $3.5bn, according to people familiar with the document. Citigroup would be asked to pay about $1.4bn and Ally Financial, which is 73.8 per cent owned by the US Treasury, would pay $860m.
However, people involved in the talks said no final decision had been made and the actual penalties could be different.
Separately, lawyers for California’s attorney-general are meeting the large banks, people familiar with the matter said. California officials declined to comment.
Friday’s meeting comes about a year after several lenders said they were halting home seizures last autumn after an uproar over improper foreclosure practices, such as so-called “robosigning”, came to light. Home repossessions have since slid, creating a huge backlog of defaulted mortgages slowly working their way through the process; home prices have tumbled; and bank stocks have plummeted as investors are not clear on when, if ever, these problems will be solved.
Participants described the forthcoming meeting as perhaps the final attempt to determine whether a grand accord can be reached between the five banks, nearly all 50 states and multiple federal agencies.
Discord between the various parties has derailed the discussions several times over the past few months. If the combined talks are abandoned, that would kill any chance of an agreement that some participants argue is needed to reassure banks and investors who fear protracted state-directed litigation and the supposed damping effect that is having on the housing market
Disagreement also remains over how any agreement would be enforced and what legal claims the various government agencies would release as part of a settlement. The two sides – the banks and the government – are close to an agreement detailing future procedures for how banks would treat borrowers who fall behind on their payments.
The total amount to be extracted from the five banks, according to the Illinois document – about $17bn – is short of the $20bn the government agencies seek.
The banks have balked at the $20bn figure, arguing that the government would be hard-pressed to prove they have seized any homes of borrowers who were not severely behind on their payments.
About 80 per cent of the settlement figure, earmarked for the federal government, could be used to fund another round of debt and payment reductions for struggling US homeowners, people with knowledge of the Illinois document said. That would be split between principal reductions on first-lien mortgages and junior liens; payment forbearance for unemployed borrowers; and short sales, blight remediation and transition assistance for homeowners to move into rentals.
The remainder, about $4bn-$4.4bn in cash, could be designated for the states, which then would divide the proceeds to fund a variety of programmes, including assistance to borrowers. About half that amount could be used to pay up to $2,000 to an estimated 1.1m aggrieved borrowers who allege they were harmed by improper practices.
People familiar with the Illinois document warned that it did not represent the states’ position, just one agency’s view of where things stood.
Kamala Harris, California’s attorney-general, has called for large debt relief for strapped homeowners. About 2m California homeowners owe more on their house than it’s worth, according to information provider CoreLogic.
Ms Harris had considered joining New York and Delaware in their investigation into Wall Street’s role in packaging mortgages into faulty securities. Such a probe would delay any settlement.
Should some banks reach an accord with California, it would likely provide a reference point for nervous bank investors. The state houses one of every seven US homeowners with a mortgage.
BofA is keen on reaching an accord that would stop potential litigation that could further cripple the company as it continues to pay for mistakes made by Countrywide Financial, the troubled mortgage lender it acquired in 2008.
On Wednesday, Moody’s Investors Service downgraded the bank’s debt largely due to the credit rating agency’s assumption that US authorities are less likely to bail out the lender should it near failure. However, in its statement, Moody’s said that if “the bank were to receive adverse legal rulings on the claims pending against it related to its mortgage business, it could have a significant impact on [its] capital position”. It added that resolution of such matters “is not entirely within the direct control of management.”
Representatives of the banks declined to comment, while spokesmen for the various government agencies either declined to comment or did not respond to messages.