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Time to sign off on mortgage-relief deal

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IN U.S. POLITICS, today’s urgent scandal often turns into tomorrow’s long, complex bureaucratic slog. And so it has been with the furor that erupted in October 2010 over the mortgage industry’s dubious loan modification and foreclosure practices.

There was plenty of outrage over the fact that lenders cut multiple legal corners as they coped with an unprecedented volume of delinquent loans; the most egregious abuse was the “robo-signing” of supposedly individually reviewed documents. Yet in the ensuing months, it became clear that few, if any, homeowners who were current on their mortgages lost their homes because of bank misconduct — and that holding the banks properly accountable for their rampant but arguably victimless wrongdoing would be no mean feat.

The 50 state attorneys general, backed by the Obama administration, saw the banks’ legal exposure as an opportunity to extract mortgage relief from them. For more than a year, the parties have been negotiating an agreement whose details have varied but whose essence has been clear all along: The banks will get a release from civil liability related to the scandal in return for reforming their procedures — and for supplying a large amount of mortgage debt relief. For the Obama administration and the states, what’s particularly valuable about the settlement under discussion is that, for the first time, the banks would grant widespread reductions in loan principal, not just restructure payments, as they have generally done until now.

This is rough justice, at best. There will be no guarantee of criminal trials for miscreant bankers. On the other hand, the beneficiaries of principal reductions will not necessarily be the same people who got foreclosed on during the age of robo-signing. Yet the deal does provide benefits to the market as a whole — starting with the banks’ promises to make verifiable and systemic changes to the way they handle loan modifications and foreclosures. More broadly, a settlement would remove a big source of uncertainty in the slowly healing housing market, enabling banks to finish unavoidable foreclosures — and to make those homes available to new buyers who would otherwise remain on the sidelines.

Alas, in recent months, progress toward an agreement has slowed. Several state governments — led by California, which has more distressed properties than any other state — have pulled out of the talks, arguing that the proposed deal would let the banks off easy. California’s view, summarized on Sept. 30 by Attorney General Kamala D. Harris, is that the banks are seeking excessive legal immunity and that California should pursue its own investigation.

Ms. Harris joined New York Attorney General Eric Schneiderman, a fellow Democrat, on the outside; he had previously been ejected from the talks by the other state AGs for insisting on the right to pursue banks for alleged securities fraud under New York law. The AGs of Nevada, Massachusetts and Delaware, also Democrats, are also balking.

Principled as these attorneys general may be, they are shortsighted. The administration’s point man on the negotiations, Housing and Urban Development Secretary Shaun Donovan, wants to get a deal done within weeks, with or without the dissenting states, on the sensible theory that the sooner principal relief starts flowing, the better. The amount on offer is reportedly about $25 billion; but it will be reduced accordingly, possibly by more than 20 percent, if California and the other states don’t join the settlement. That’s the price those attorneys general might have to pay for letting the ideal be the enemy of the achievable.

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