Four Attorneys General Say Foreclosure Deal Terms May Cause `Moral Hazard

A plan to resolve a nationwide probe of foreclosure and mortgage-servicing practices is being opposed by four more Republican state attorneys general, who say the terms of a deal may foster a “moral hazard.”

In a letter to Iowa Attorney General Tom Miller, a Democrat who has taken the lead in the investigation, the officials objected to new documentation requirements and principal reductions outlined in the proposed settlement submitted to the country’s top mortgage-servicing companies this month.

Yesterday’s letter, a copy of which was obtained by Bloomberg News, was signed by attorneys general Kenneth Cuccinelli of Virginia, Greg Abbott of Texas, Pam Bondi of Florida and Alan Wilson of South Carolina. The attorneys general of Oklahoma, Alabama and Nebraska sent Miller a letter with their objections on March 16.

The settlement offer “appears to reach well beyond the scope of our enforcement role, and, in some instances, far exceeds the scope of the misconduct which was the subject of our original investigation,” according to the letter, which was verified by Brian Gottstein, a spokesman for Cuccinelli.

A key objection is the “moral hazard” created by the proposal to reduce homebuyers’ loans because it “rewards those who simply choose not to pay their mortgage,” the attorneys general said.

‘Starting Point’

Geoff Greenwood, a spokesman for Miller, said by e-mail that while there are disagreements among the states, there is consensus on the need to work together on the foreclosure problems. The current proposal is “a starting point,” he said.

Gottstein and Lauren Bean, a spokesman for Abbott, declined to comment, as did Mark Plowden, a spokesman for Wilson.

Jennifer Meale, a spokeswoman for Bondi, didn’t immediately respond to an e-mail message seeking comment after regular business hours yesterday.

Federal agencies and state attorneys general on March 3 delivered a 27-page settlement proposal that would set standards for how mortgage servicers conduct foreclosures and service loans. Those banks include Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC)

The terms would force procedural changes on the servicers, including banning companies from initiating foreclosure proceedings while a loan modification is pending, providing borrowers with a single point of contact, and informing borrowers of denied modifications in writing.

Loan Modifications

Borrowers who are enrolled in a trial loan modification under a federal program and make three loan payments on time would get a permanent loan modification under the proposal. The document would give attorneys general and the Consumer Financial Protection Bureau responsibility to police servicers’ compliance with any settlement.

The terms would impose documentation requirements on banks that go beyond Virginia law, Cuccinelli said in an interview on March 11. A “major problem” is that government-owned mortgage companies Fannie Mae and Freddie Mac aren’t involved in the negotiations, he said.

U.S. House Republicans also criticized the proposal.

To contact the reporters on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net; Tom Schoenberg in Washington at tschoenberg@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net; David E. Rovella at drovella@bloomberg.net.

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