California is wooed in mortgage settlement talks

California is reemerging as a central focus for state attorneys general hoping to reach a nationwide wrongful-foreclosure settlement with major banks, even though the Golden State walked away from talks three weeks ago.

Iowa Atty. Gen. Tom Miller, who is leading the negotiations on behalf of the states and federal agencies, met with representatives of the nation’s five largest mortgage servicers in Washington on Friday to discuss details of a new plan aimed at enticing California back into the fold.

Under the proposal, Miller and the other attorneys general want the banks to devote $5 billion to refinance the mortgages of as many as 300,000 “underwater” U.S. homeowners, those who owe more than their houses are worth, according to a person familiar with the plan who requested anonymity because he was not authorized to speak on the matter.

The homeowners would have to be up to date on their payments and would get new mortgages with lower interest rates, a move intended to ease those homeowners’ finances. The banks have countered with a $2-billion deal aimed at reaching up to 150,000 homeowners.

The refinancing plan would be added to the already $20-billion proposal the states have negotiated, which includes principal reduction for certain homeowners and mortgage servicing and foreclosure reforms.

The refinancing plan would cover homeowners whose loans are owned by banks joining in the talks: Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc.

The Obama administration also is pushing a refinancing plan for underwater loans owned by the large mortgage investors Fannie Mae and Freddie Mac. Obama officials said details of that plan are expected to be unveiled in coming weeks.

In exchange for the refinancing component, state attorneys general would release the banks from mortgage origination allegations — that is, allegations of fraud and abuse in the creation of home loans.

The concession to give up origination claims goes beyond the scope of the original investigation by the states, which was intended to probe so-called robo-signing, the practice of foreclosing using faulty documents.

When she left the talks three weeks ago, California Atty. Gen. Kamala Harris said the state was “being asked for a broader release of claims than we can accept and to excuse conduct that has not been adequately investigated.”

Asked whether the reported details of the deal would be enough for Harris to return to the table, her spokesman, Shum Preston, declined to comment.

California has an estimated 2.1 million underwater borrowers, according to research firm CoreLogic Inc.

Kevin Stein, associate director of the California Reinvestment Coalition, a group that applauded Harris’ decision to walk away from the negotiations, said the state would be giving up too much for too little if it signed on to the new proposal.

“Releasing origination claims is a big deal — that is where the crisis started,” Stein said. “In some ways we are more concerned about people more clearly at risk of foreclosure, and what we are really interested in is principal reduction.”

Harris has left the door open to signing on to a bigger settlement, and one person familiar with the negotiations in Washington said that the banks believe California is likely to return to the talks because robo-signing, which often involved the mass signing of affidavits and other court documents, hasn’t been proved to be pervasive in the Golden State.

The California foreclosure process largely exists outside of courtrooms, and an order is not needed to foreclose on a home in the Golden State.

Harris has created a strike force to investigate all aspects of mortgage fraud, and has expressed reluctance to sign a deal that might limit her probes.

This week, Harris’ office reportedly served subpoenas on Bank of America, inquiring whether the bank and its Countrywide Financial subsidiary sold investments backed by risky mortgages to institutional and private investors in California under false pretenses.

New York, Delaware, Nevada, Massachusetts, Kentucky and Minnesota also have voiced unhappiness with the deal being discussed by the attorneys general because of the release from liability being offered to the banks. New York and Delaware have been cooperating in their own probes separate from the coalition.

alejandro.lazo@latimes.com

Times staff writer E. Scott Reckard contributed to this report.