As federal regulators clamp down on foreclosure procedures at the big banks, and the government sets new lender requirements for risk retention in residential mortgages, the cry from the industry is that this will only hamper the housing recovery and price more borrowers out of home ownership.

“High down payment and equity requirements will not have a meaningful impact on default rates. But they will require millions of consumers, who are at low risk of default, to either put off buying a home or pay unnecessarily high rates,” according to a statement from a coalition including the Mortgage Bankers Association and the National Association of Home Builders. “The government is penalizing responsible consumers, making homeownership more expensive or simply out of reach for millions. We urge regulators to develop a final rule that encourages good lending and borrowing without punishing credit-worthy consumers.”

On the one flank you have the industry fighting these new regulations and on another they are fighting a potential settlement with the state attorneys general that could involve fines that would go toward lowering mortgage principal for troubled borrowers. They in fact funded a study that found such a settlement would prolong the foreclosure crisis and drive up mortgage interest rates. That enraged consumer advocates. Iowa’s attorney general Tom Miller, heading up the 50 state group looking to impose penalties shot back:

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Article source: http://www.cnbc.com/id/42592108?__source=RSS*blog*&par=RSS

At the end of a day-long negotiation session over the foreclosure paperwork mess at the Department of Justice, Iowa Attorney General Tom Miller and Associate Attorney General Thomas Perrelli came out for a brief chat with reporters.

They essentially said nothing.

Miller: “We had a good first meeting with the banking and servicer industry- emphasis on good and first. It was a first meeting, it was a breaking of the ice, and that takes some time and is part of the process. The discussion was good—I think it was on a good level, given the exchange of ideas and rationale and principles. I think we have a long way to go—again emphasis on first meeting.”

Perrelli: “Tom Miller is a fantastic partner, we’re lucky to be working together. I’ll echo what Tom said, I think it was a very productive first meeting, with serious discussion of a wide range of challenges and problems in the mortgage servicing industry.”

The banks weren’t talking, at least the representatives in the meeting weren’t talking, nor were their spokespeople. But big bank executives have been commenting on the biggest sticking point in a potential settlement over foreclosure practices: Principal reduction.

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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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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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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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