State and federal officials, who have been negotiating with financial firms over how to address widespread abuses in foreclosure practices, are moving closer to a settlement that could force banks to reduce the principal on mortgages for some borrowers who owe more than their homes are worth.
An official familiar with discussions between the government and the financial industry said the settlement also could require that banks increase their efforts to modify mortgages for distressed borrowers and pay penalties that could be used as restitution for homeowners who have wrongfully faced foreclosure.
"State attorneys general are working closely with a number of federal agencies on a potential settlement," Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller (D), who is leading a 50-state investigation of the foreclosure mess, said in an interview Wednesday. He added, "We haven't finalized anything, and we're still working on some very complicated issues."
For months, the state officials have been conducting separate negotiations with a handful of firms, such as Bank of America and J.P. Morgan Chase, and pressing them to accept similar terms. Officials said the talks have been complex because each firm's situation is different. Moreover, multiple state attorneys general and nearly a dozen federal agencies are involved in the discussions.
"We're all trying to work to find some common ground," Greenwood said.
The core group of attorneys general heading up the foreclosure effort has been debating the best course of action - both among themselves and with their federal counterparts - even as sensitive talks with bank executives over the final details of the agreements continue.
State attorneys general, the Obama administration and independent federal regulators have been conducting several parallel inquiries into the nationwide foreclosure breakdown for months.
Since last May, the Federal Housing Administration has been investigating why large mortgage companies have not modified the loans of borrowers who are struggling to pay them. These firms are required by law to make such modifications because the loans are guaranteed by the FHA, which promotes lending to first-time home buyers. The FHA has found that some major mortgage lenders have not followed the law in their modification programs but the agency has not named the lenders publicly.
In addition, a task force involving the Justice Department and Securities and Exchange Commission is examining the potential for fraud in how banks have seized homes from borrowers facing foreclosures, and in how mortgage companies and banks have disclosed to investors details of foreclosure options.
Federal investigators are also looking at whether banks participating in federal lending programs misled officials about foreclosure and committed wire or mail fraud.
But criminal action is not likely to occur soon. Any immediate settlement probably would target foreclosure documentation problems and the failure to modify loans.
Federal officials looking into problems late last year found widespread and "inexcusable" breakdowns in basic controls in the foreclosure process, a top Treasury official told members of the new Financial Stability Oversight Council.
"These problems must be fixed," then-Assistant Treasury Secretary Michael Barr told the panel's members at the time.
The extensive foreclosure problems - which range from flawed and fraudulent paperwork to questions about improper or incomplete loan transfers - surfaced in September when large firms such as Bank of America and Ally Financial abruptly halted foreclosures.
Staff writers Zachary A. Goldfarb and Dina ElBoghdady contributed to this report.