Government Nears Robo-Signing Settlement With Major Banks

The federal government is nearing a a settlement with mortgage servicers in a case in which they are accused of initiating foreclosures based on inaccurate and sometimes fraudulent documents, or robo-signing.

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The settlement could help a million homeowners by reducing what they owe on their mortgages, said Housing Secretary Shaun Donovan. The settlement would also provide cash payments to a smaller number of families directly harmed by the servicers’ conduct.

The announcement of a settlement could come within weeks, Donovan told a meeting of the nation’s mayors on Wednesday.

Any settlement would have to be approved by state attorneys general and the major mortgage services. Geoff Greenwood, spokesman for Iowa Attorney General Tom Miller, said that his office believes they are “really close to reaching a potential settlement.”

A deal worth between $19 billion and $25 billion is expected, and would likely cover the five biggest mortgage services: Bank of America (NYSE:BAC), JPMorgan (NYSE:JPM), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), and Ally Financial (NYSE:ALLY-B).

The settlement may help more borrowers, including those who owe more on their mortgages than their homes are worth, refinance into lower-interest-rate loans, while setting more stringent mortgage servicing standards for the entire industry.

In the U.S., almost one in five homes with a mortgage — 11 million borrowers — are underwater, according to market researcher CoreLogic.

State attorneys general also hope to demonstrate that principal reduction decrease the risk that homeowners will default on their loans, a principal that has been shunned by loan owners who say it hasn’t been proven to work.

Though not all states are involved in negotiations, they could join in a final deal or file a suit of their own.

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