The Obama administration has significantly diminished a proposed homeowner relief program that initially aimed to force the nation's five largest mortgage companies to reduce monthly payments for three million distressed homeowners, according to documents and people involved in the discussions.
The administration has shifted its focus to delivering lowered payments for as few as one million homeowners, according to sources that are party to the deliberations.
However, the pot of money the administration hopes to extract from the firms to fund those modifications -- $25 billion -- remains unchanged, these people said, partly to fund expensive loan modifications, partly as a function of the desire by some agencies to punish the firms for their mortgage practices.
The demise of the mortgage relief proposal would constitute a significant setback in state and federal efforts to resolve allegations of widespread legal abuses by major mortgage lenders. State law enforcement authorities have in recent months been in discussions with federal banking regulators and Obama administration officials to try to craft a settlement that could effectively close the books on complaints of wrongdoing that have been attendant to a historic surge in the numbers of American homes falling into foreclosure.
It's not clear why the various federal agencies involved in the internal deliberations lowered their target for the number of assisted homeowners. But the administration has been stung by criticism that a federal program to modify home loans has failed to reach its goal of helping three to four million homeowners. Also, critics have said that the previous target of reducing payments for three million homeowners as part of this settlement was far too high given the amount of money involved.
The estimates are fluid, sources said, as nearly a dozen federal agencies weigh competing concerns over how best to help homeowners, stabilize a deteriorating housing market, and punish banks for abusive mortgage practices.
At various points, the agencies have wanted the banks to modify those mortgages within six months, nine months, one year, 18 months, or even by Dec. 31 of this year.
The Huffington Post first reported on March 16 that the administration was hoping to force banks to reduce payments for as many as three million troubled borrowers in as few as six months.
Though the talks are ongoing, internal divisions have long hobbled negotiations inside the federal government. The Office of the Comptroller of the Currency and the Office of Thrift Supervision, which regulate large banks that handle the majority of home loans, have sought to shield the firms from punitive treatment, according to the sources.
The financial regulators argue that abusive mortgage and foreclosure practices are not as widespread as believed, and that harsh penalties -- including forcing banks to lower homeowners' outstanding debt -- are unwarranted. Treasury Secretary Timothy Geithner has in the past argued against widespread principal reduction programs.
Banks agree. Consumer advocates and other federal agencies do not. But there is little agreement between federal agencies over how to punish the banks.
Officials leading the 50-state probe remain committed to a settlement that includes hefty penalties and relief for homeowners. However, seven Republican state attorneys general have in recent weeks voiced opposition to lowering borrowers' loan balances, while some Democrats argue that settlement talks are premature as officials have yet to conduct a thorough-enough investigation. At this point, a unified agreement between the states appears unlikely.
The mortgage relief plan has been advanced by the administration as a key component of any eventual settlement.
As described by sources involved in the talks, the administration intended to pressure the mortgage companies -- Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial -- to pay as much as $30 billion in fines, and then direct that money toward lower payments for distressed homeowners.
The proposed settlement had been touted as a way to accomplish the four goals set by state and federal policymakers and regulators as part of their multi-agency investigations into abusive mortgage practices: punishing banks for violations of state laws and federal rules; assisting troubled homeowners; stabilizing a deteriorating housing market; and dissuading firms from committing such abuses in the future.
But the size of the fines at issue to finance a large relief effort for homeowners triggered an intense lobbying campaign by financial industry leaders and Republican members of Congress.
The complexity of the proposal, recent copies of which were obtained by HuffPost, underscores the challenges regulators face in trying to not only punish specific firms for abusing homeowners but also to reform how the industry treats borrowers and stabilize the housing market -- and in getting nearly a dozen federal agencies to agree on the solution.
Purchases of new U.S. homes dropped last month to the slowest pace on record, according to the Commerce Department. Prices declined to the lowest level since 2003, according to the National Association of Realtors. About 6.9 million homeowners were either delinquent or in foreclosure proceedings through February, according to data provider Lender Processing Services.
State attorneys general, their states' top law enforcement officials, are trying to punish firms for violations of state law and homeowner mistreatment. Federal officials have an eye toward the slumping housing market, which is holding back a robust economic recovery and poses dangers to reelection chances in 2012.
The Obama administration wants a quick resolution to the probes, and is putting pressure on the small group of state attorneys general leading their investigation to wrap it up, sources said. Earlier this month, Geithner told a Senate committee that "all parties have a stake in bringing this to resolution as quickly as possible."
"It's very important that we try to bring this to bed as quickly as we can," the treasury secretary told the Senate Banking Committee.
Meanwhile, those hoping for a deep investigation into industry practices will likely be disappointed, as state regulators also hope to come to a quick solution.
"This decision isn't being made in a vacuum," Iowa Attorney General Tom Miller said in a recent interview. "If we did a more thorough investigation, a complete investigation, it would put back settlement a year, and that's an important year in time. Homeowners need relief now. The housing market needs relief now."
New York Attorney General Eric Schneiderman is among a group of state officials who have voiced concerns with the lack of a robust investigation, sources say.
"That's a big price to pay for the additional investigations," Miller said of the potential delay. He added that state regulators had conducted an in-depth audit of Ally Financial, a state-regulated firm and the fifth-largest mortgage handler in the country, according to Inside Mortgage Finance. It was the "most in-depth analysis and investigation of any of the [mortgage] servicers that has been done or will be done," Miller said.
State regulators will use their findings from Ally as part of the settlement negotiations with the other large mortgage firms, Miller said, as practices were likely the same across the biggest firms.
As for the federal proposal, the documents provide insight into how federal officials view the housing market. It's in horrible shape.
Officials wanted the three million mortgage modifications to come from a pool of owner-occupied homes in which the homeowner was at least 60 days behind on his payments, yet not in a modification process, the documents dated Feb. 20 show.
Federal regulators also wanted banks to target two classes of homeowners: those who owe more on their mortgages than their home is worth and those with equity.
Officials estimated that 1.1 million eligible homeowners owe more than $1.10 for every dollar their home is worth, according to the documents. For them, banks were to either reduce the loan balances on their first mortgage to 103 percent of its value, or pay off the debt and allow homeowners to undergo a short sale or refinance into a taxpayer-backed mortgage offered by the Federal Housing Administration.
For the estimated 2.2 million homeowners who are only slightly underwater (less than 110 percent) or have equity in their homes, banks were to reduce those borrowers' monthly payments by 30 percent, according to the documents.
Speed was also an issue.
All mortgage principal write-downs were to occur within six months from the date of the settlement, the documents show. If a bank did not meet their quota of mortgage modifications, they'd have to pay state officials a fine of $10,000 per loan they fell short.
Sources said many of these details were constantly changing, sometimes from day to day, as proposals zipped from agency to agency. They have not yet been shown to the targeted banks, nor have they been publicly disclosed.
The documents also show that regulators questioned many of their own ideas.
Officials argued about the level to which loan balances should be written down, for example. In one document, regulators questioned whether they should make banks write down mortgage principal to 97 percent of the home's value, or 115 percent.
They also debated whether they should make the banks extinguish the second liens that backed first mortgages that were modified, or to simply follow the current practice in the administration's Home Affordable Modification Program, which is to write down loan balances on second mortgages proportional to the write-down on the first mortgage.
Bank of America, Wells Fargo, Citigroup and JPMorgan Chase collectively hold more than $400 billion in second mortgages and home equity lines of credit, regulatory documents show.
Regulators also discussed whether to provide incentives to banks for modifying loans ahead of schedule, a possible acknowledgment of the millions of borrowers on the verge of having their homes repossessed.
Spokesmen for the Department of Justice, Federal Deposit Insurance Corporation, Federal Reserve, Department of Housing and Urban Development, the Federal Housing Finance Agency and the Treasury Department either declined to comment or did not respond to requests for comment.
READ the documents:
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Shahien Nasiripour is a business reporter for The Huffington Post. You can send him an e-mail; bookmark his page; subscribe to his RSS feed; follow him on Twitter; friend him on Facebook; become a fan; and/or get e-mail alerts when he reports the latest news. He can be reached at 646-274-2455.