Foreclosure Settlement's Value Hinges on California's Participation

As the national settlement talks to resolve mortgage companies' wrongful foreclosures inch towards a conclusion, the size of the deal hinges on California.

Starting Wednesday and continuing throughout the remainder of the week, negotiators representing 50 states attorneys generals and the Obama administration are distributing to all parties documents outlining two possible deals: one based on California's participation and a second, smaller one, based on California's absence, said sources familiar with the discussions. The documents provide a hard number for each state's share of the settlement and also an estimate of the potential benefits to homeowners under both scenarios. California, which has the nation's highest foreclosure rate, is one of a handful of states that have threatened to leave the deal over concerns that the settlement is too soft on banks.

That California's participation could sweeten the terms of the deal reflects the important role that this state plays in any settlement. As part of the settlement, participating states will agree not to pursue various claims against the lenders in the future. California, which is not only a large state but has been ground zero for many of the wrongful foreclosures, represents significant future liability for banks. Thus, the lenders are more inclined to offer a greater sum to ensure that California will not pursue claims against them down the road.

"The negotiating team is in the process of sending documents to fellow attorneys general," said Geoff Greenwood, spokesman for the Iowa attorney general, Tom Miller, one of the lead negotiators.

The Obama administration, along with a coalition of state law enforcement officials, is pursuing a settlement with big banks over their role in the practice of "robo-signing" and other alleged forms of mistreatment of struggling homeowners, including the fraudulent notarization and forging of mortgage documents and other wrongful foreclosure practices.

The documents are being distributed in advance of a meeting on Monday in Chicago where Miller, U.S. Housing and Urban Development Secretary Shaun Donovan, and Tom Perrelli, U.S. associate attorney general, will brief Democratic state attorneys general on the potential settlement. A similar meeting will take place on Monday, via a phone conference, for Republican state attorneys general. Greenwood confirmed both meetings in a phone call with The Huffington Post.

On Wednesday, Donovan declared that the negotiators were "very close" to reaching an agreement, though sources familiar with the talks said that nothing will be announced prior to President Barack Obama's State of the Union address next week. "States need time to review the documents, weigh the pros and cons of the deal, consider the alternatives and decide if it is something they want to join," said a source familiar with the discussions.

After wrongful foreclosure practices came to light in October 2010, attorneys general from all 50 states banded together with the federal government to punish five large financial institutions -- Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial -- for mortgage-related misconduct, including robo-signing and failing to provide mortgage modifications to eligible homeowners. As it currently stands, that punishment would take the form of a civil settlement worth as much as $25 billion. The deal would reform the mortgage servicing industry and require banks to offer relief to homeowners in the form of modifications, principal write-downs and refinancing, among other options.

The negotiations hit a snag this summer when several attorneys general -- most notably Eric Schneiderman of New York and Kamala Harris of California -- objected that the deal was too narrowly focused on robo-signing and mortgage servicing and that it would release banks from liability for too much potential wrongdoing. Schneiderman and Biden called for a more thorough investigation of how home loans had been originated and sold to investors.

In October 2011, Delaware Attorney General Beau Biden filed suit against Mortgage Electronic Registration System, claiming the company intentionally makes it harder for borrowers to stop a foreclosure. In December, Massachusetts Attorney General Martha Coakley filed a lawsuit against five of the largest U.S. banks, accusing them of deceptive foreclosure practices. Also in December, Nevada Attorney General Catherine Cortez Masto filed suit against Lender Processing Services for deceiving Nevada homeowners.