The nation’s five largest banks met with government officials and state attorneys general on Wednesday to resolve allegations of wrongdoing in mortgage lending and lay the framework for new foreclosure rules. Both the banks and state attorneys general have come up with proposals in changes to mortgage servicing to help improve the system but now they must hash out a settlement.

The five banks participating in Wednesday’s talks were Bank of America, Wells Fargo, Citibank, Chase, and GMAC.

Scant details were released about what the talks on Wednesday centered on during the meeting, but one thing officials did say was that the settlement was going to take a long time.

“Obviously this is a very large set of issues, and it’s going to take some time to work through,” said Thomas J. Perrelli, associate U.S. attorney general.

Government officials and regulators have been seeking solutions to prevent future lending abuses after the “robo-signing” scandal set off last fall, which led to reports of foreclosures that were done without proper reviews of paperwork.

In proposals submitted prior to the meeting, regulators and state attorneys general have called for banks to include mortgage principal writedowns as part of the proposed settlement.

However, banks have argued that cutting the mortgage debt of foreclosed home owners would create a moral hazard and prompt more home owners to default in order to get a better deal.

“Principal writedown for people who could pay their mortgages? Yeah, that’s off the table,” JPMorgan Chase CEO Jamie Dimon told reporters after the meeting.

Analysts say lengthy negotiations could work in the banks’ favor.

“The banks’ strategy is to run the clock,” speculates Adam Levitin, a Georgetown University law professor. “The chances of a settlement that meaningfully reforms mortgage servicing and makes the banks pay an appropriate price for illegal conduct are rapidly slipping away.”

About two million households in the U.S. are in foreclosure.

Banks are expected to face fines and penalties following the upcoming release of a report by the Federal Reserve, the Office of the Comptroller of the Currency, and other banking regulators that is to further outline lending abuses. Any fines and penalties imposed would be separate from any monetary settlement that results the state attorneys general meetings.

http://www.realtor.org/RMODaily.nsf/pages/News2011033104?OpenDocument