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Principal reduction still alive in robo-signing settlement

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Homeowners hurt by faulty foreclosure practices by the largest mortgage servicers may still get a principal reduction under one potential settlement with the state attorneys general, according to a source familiar with the talks. The 50 state AGs launched an investigation one year ago when servicers were found to be forging signatures and filing faulty affidavits in state courthouses across the country. A recent proposal in the settlement talks would force the banks to provide refinancing for underwater borrowers, who are also current on their loan. This new proposal would not take the place of a plan that would use funds from the fine amount to write down principal for some affected borrowers, according to the source, who was not authorized to speak publicly and requested confidentiality. "The refi plan is in addition to principal reduction, which is still very much a part of this," the source said. The settlement talks bogged down late in the summer when some AGs grew unhappy about releasing the banks from other liabilities such as harmful securitization practices and alleged documentation problems at Mortgage Electronic Registration Systems. Some, including the foreclosure saturated states New York and California split off to pursue their own investigations. The Nevada AG is currently pursuing criminal actions against the servicers, and the Massachusetts AG is drawing up plans to go after MERS. Top Republican AGs railed against the investigation from the start, claiming such a crackdown was beyond the powers of their offices and should be resolved by state and federal regulators. Borrowers in states such as Texas and Florida may not have access to the principal reduction and refinancing offers as these AGs have said such an agreement would only promote strategic default. But Iowa AG Tom Miller pressed on, asserting in a recent letter the end settlement, which could come with a fine as high as $25 billion, would be narrow and focused on servicing mistakes. Write to Jon Prior. Follow him on Twitter @jonaprior.

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