It’s not like we didn’t already know the banks were opposed to forgiving principal on troubled loans, even though they claim they are doing a little of that now. But today CNBC’s Melissa Francis got an earful from JPMorgan Chase’s [ JPM 45.53  -1.03 (-2.21%) ] Charlie Scharf, CEO of Retail Financial Services.

“We’ve got to be very careful that we don’t create an environment where we encourage people not to pay, and that’s the danger you have when you get into broad based principal forgiveness,” said Scharf.

This is all in reaction to the big push on principal reduction by state attorneys general, meeting in Washington DC this week. While the head of the 50-state investigation into so-called “Robo-signing” foreclosure paperwork issues, Iowa Attorney General Tom Miller, did not put forth a fine or penalty fund in his first settlement proposal, the expectation is that banks will be subject to such a fine that would be used for banks to write down mortgage principal.

Already, Senate republicans are blasting any payment.

Sen. Richard Shelby, the top republican on the Senate Banking Committee, at a hearing today put the number to be “extracted” from banks at $30 billion.

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Despite the fact that banks claim they are ramping up repossessions again and refiling foreclosure documents, the numbers don’t appear to prove that. Foreclosure filings fell 14 percent in February month to month and fell 27 percent year over year. That is the largest annual drop since RealtyTrac began running the numbers in 2005.

“Foreclosure activity dropped to a 36-month low in February as allegations of improper foreclosure processing continued to dog the mortgage servicing industry and disrupt court dockets,” said James J. Saccacio, chief executive officer of RealtyTrac.

“While a small part of February’s decrease can be attributed to it being a short month and bad weather, the bottom line is that the industry is in the midst of a major overhaul that has severely restricted its capacity to process foreclosures. We expect to see the numbers bounce back, but that will likely take several months. And monthly volume may never return to its peak in March 2010 of more than 367,000 properties receiving foreclosure filings.”

To prove the point, in this month’s report RealtyTrac broke out the numbers by judicial foreclosure states (where foreclosure documents are filed in court before a judge) and non-judicial foreclosure states; the former are where the banks froze most actions, but they are also slowing the process and going over procedures in non-judicial foreclosure states as well. 

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There is no official settlement.

There is no multi-billion dollar fund or penalty and there is no word from Federal Regulators as to how the banks will ultimately “fix” the foreclosure paperwork issues.

Yet.

But a meeting here in DC of the fifty state attorneys general was too good to pass up for a couple of hundred protesters demanding, “a strong settlement that includes principal reduction on millions of mortgages.”

I have to hand it to the Iowa deputy attorney general, Tam Orminston, who put himself into the middle of a crowd of troubled, and angry borrowers, led by National People’s Action and PICO National Network. One by one borrowers told of their mortgage woes, amid shouts of “That ain’t right!” from the surrounding crowd.

The protesters called a potential $20 billion settlement with the big banks “chump change,” even though that number is far from agreed upon. As I stood watching, Missouri Attorney General Chris Koster came over to our camera to chat. He was advocating that a settlement be done quickly and almost sounded as if he were willing to back off some of the demands of a 27 page settlement “framework” from Iowa attorney general Tom Miller, who is leading the 50 state foreclosure investigation, that outlines new foreclosure procedures and loan modification mandates for the banks as part of a potential settlement. That document will be presented to all the AGs this afternoon but was leaked to the press Friday.

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