California calls $25-billion mortgage settlement ‘inadequate’

Calif. Atty. Gen. Kamala D. Harris’ office has called a proposed $25-billion settlement with the nation’s mortgage industry “inadequate.”

“We’ve reviewed the details of the latest settlement proposal from the banks, and we believe it is inadequate for California,” Shum Preston, a spokesman for Harris, said in a statement. “Our state has been clear about what any multistate settlement must contain: transparency, relief going to the most distressed homeowners and meaningful enforcement that ensures accountability. At this point, this deal does not suffice for California.”

Many analysts consider California’s participation to be key to a strong deal. Harris walked away from talks with the banks last year, saying not enough was being offered by the financial institutions for California homeowners.

Since then, certain terms have been added to lure the Golden State back to the table, and Harris has opened separate inquiries into the mortgage business.

State attorneys general have received drafts of a $25-billion settlement with the nation’s biggest banks that would overhaul foreclosure and mortgage servicing practices. No deal has been officially reached among the states, federal agencies and the nation’s five largest mortgage servicers: Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co.,Citigroup Inc. and Ally Financial Inc. Individual states must decide whether they will join a settlement or pursue independent lawsuits and investigations.

The proposed $25-billion settlement would cover only mortgages held by the banks privately and exclude those from Fannie Mae and Freddie Mac.

The biggest component of the deal would be a $17-billion principal reduction program that the Center for Responsible Lending this week said would “provide an important template for ways banks can use principal reduction to reduce unnecessary foreclosures and put the country back on a path to economic recovery.”

That money would go toward writing down the principal of homeowners who are “underwater,” on their mortgages, or owe more on their properties than they are currently worth. Negotiators estimate that about 1 million homeowners could benefit, with an average principal reduction on those loans of $20,000.

In addition, $5 billion would go to a reserve account for state and federal programs and to individual homeowners harmed by bad servicing practices. Negotiators estimate about 750,000 people could receive checks for about $1,800. An additional $3 billion would help homeowners refinance their loans at a rate of 5.25%.

In exchange, attorneys general would agree to release the banks from further action related to the improper servicing of loans as well as claims against originating mortgages. Several attorneys general, including New York’s Eric Schneiderman and California’s Harris, have voiced concerns that those releases are overly broad and would preclude them from carrying out ongoing investigations.

Schneiderman was appointed Tuesday by President Obama as co-chairman of a new investigative effort that will try to coordinate existing federal and state probes into mortgage practices before the financial crisis. Schneiderman promised Wednesday to move aggressively.

A spokesman for Schneiderman said in a statement that the New York attorney general would not sign onto a foreclosure settlement that would limit his ability to carry out investigations of the mortgage crisis.

Iowa Atty. Gen. Tom Miller, who has led negotiations of states with the nation’s banks, has said that the deal would not release banks from claims of securitization.

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