Word was last week that federal banking regulators, not the state attorneys general, were going to announce some kind of “enforcement action” against 14 big banks/servicers in the so-called “robo-signing” foreclosure paperwork mess today or tomorrow.

Now I’m told that may be a bit delayed, and now I’m reading the state attorneys general’s expected punitive monetary “settlement” is also in question.

The regulators are all about fixing and tightening the process of processing foreclosures. The AGs need to appease their constituents a bit more by getting something back from the big banks, which they claim got homeowners into this mess in the first place and then proceeded to mess it up even more when they couldn’t handle the outcome of their wrongdoings, i.e. foreclosures.

The controversy among the AGs is largely over principal forgiveness. Some have proposed a $20-25 billion fund that the banks would pay into that would go to lower the balance of troubled borrowers’ loans. A report today from three professors and banking experts, Charles Calomiris of Columbia Business School, Eric Higgens of Kansas State U and Joseph Mason, of the Wharton School of Business, argues that a settlement involving principal write down “would generate significant unintended negative consequences for housing and financial markets.”

Here’s the gist of it:

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This week state attorneys general from Virginia, Texas, Florida and South Carolina sent a letter to their colleague in Iowa, Attorney General Tom Miller.

He is leading the 50 state investigation into the so-called “robo-signing” foreclosure paperwork scandal.

Recently he presented the group with a ‘term sheet’ of a possible settlement with the big banks.

While there were no exact details, it sets up certain loss mitigation requirements which could include principal reduction for troubled loans.

The four AGs say they are concerned, “The term’s sheet’s principal reduction proposals may also have unintended consequences. These proposals do a disservice to homeowners who, despite an economic downturn, have worked hard to maintain their mortgages.”

Essentially they’re making the slippery-slope/moral hazard argument that principal reduction “rewards those who simply choose not to pay their mortgage—because they can simply take advantage of lenders’ obligation to honor virtually automatic principal write-downs.”

Well no sooner did this letter hit the news that a top mortgage analyst over at Amherst Mortgage Securities made just the opposite case: “It is very dangerous not to do these modifications and hence exacerbate the vicious home price depreciation/negative equity cycle.”

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