The state attorneys general are closing in on a settlement figure with the five largest mortgage servicers over faulty foreclosure practices that surfaced one year ago. The largest servicers include Bank of America (BAC), JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C), and Ally Financial (GJM), according to Iowa AG Tom Miller’s office, which is leading the talks. “We think we have reached a settlement amount with the five largest servicers,” said a spokesman for Miller, who said additional agreements with other mortgage servicers are not included in the current settlement. “If we end up settling beyond the five, that would increase the amount.” At the end of 2010, these top banks serviced more than $6.06 trillion in mortgages for a combined market share close to 58%. A signed agreement is not imminent but a tentative figure, which Miller’s office could not confirm, would equal $25 billion. Of that, $20 billion would potentially go to principal reduction and refinancing for borrowers who are current on their mortgage but who owe more than their home is worth, according to a source with direct knowledge of the talks. According to the data analytics firm CoreLogic (CLGX), 11 million borrowers are currently underwater, but Federal Housing Finance Agency Acting Director Edward DeMarco reaffirmed this week that he would not allow principal reductions on any mortgages guaranteed by Fannie Mae or Freddie Mac. This would mean any of the principal-reduction efforts would have to be focused on the privately funded mortgages in the servicers’ portfolios. The other $5 billion amount would reportedly go directly to borrowers who experienced a financial hardship because of the improper foreclosure. This could include a $1,500 payment to the borrower. However, this is a very tentative figure that could increase, according to the source. Lost paperwork during the modification process and languishing foreclosure cases in court systems across the country could be just a few examples of the servicing and foreclosure abuses borrowers could cite. Borrowers who take the payout would not be barred from pursuing the bank for further damages in court as the proposed settlement is currently being structured. Also, issues related to Mortgage Electronic Registration Systems and Lender Processing Services (LPS) will not be involved in the settlement. Several state AGs including California and New York split off from the talks over how much liability the settlement the banks would be released from. The Iowa AG office has said in the past that all 50 state AGs will be given the opportunity to sign the deal. Analysts at FBR Capital Markets believe the deal hinges on decisions from California AG Kamala Harris and the largest servicer BofA. It must be both large enough for Harries and release enough liability for BofA in order to achieve a multistate deal. Otherwise, FBR analysts said, the AGs could begin splitting off even more. On Tuesday, federal regulators cleared independent third parties to begin reviewing roughly 4.5 million foreclosure cases at the 14 largest servicers as part of consent orders signed in April. Write to Jon Prior. Follow him on Twitter @JonAPrior.

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