State and federal regulators will submit a second term sheet to big banks in an attempt to settle the foreclosure fraud investigation, with some concessions to banks. But it’s still unclear where the penalties for violations of law and abuse of borrowers will wind up.

The new term sheet will mark another attempt to get bankers and policymakers on the same page regarding the treatment of borrowers who fall behind on their mortgage payments or default on their obligations. But it is not expected to detail any fines to be meted out in response to banks’ flawed practices, which include improper home seizures and other actions that broke federal and local laws.

Officials also remain undecided on a possible mandate to banks to reduce borrowers’ loan balances, according to the three sources, who were not authorized to speak publicly about the matter. Banks are reluctant to slash mortgage principal balances; some agencies in the Obama administration want to require it, as do most of the state attorneys general leading their mortgage probe. A vocal minority — all Republicans — are opposed.

Shahien Nasiripour detailed an April 28 meeting between regulators and bank representatives, where the banks claimed that mandating principal reductions would “trigger a stampede of strategic defaults.” There is no evidence whatsoever of strategic defaults currently, despite plenty of claims by the same banking representatives. In fact, to the extent that strategic defaults exist, they happen in commercial real estate, where corporations make the rational business decision to cut their losses. So far this phenomenon is non-existent in the residential mortgage market, and I’d say that banks are misrepresenting the facts in making this argument.

In addition, the banks stressed that, if they were to sign on to any deal, they would want indemnification from legal liability in foreclosure fraud, robo-signing and servicer abuse. Many law enforcement officials have rejected the idea that they should give up the ability to pursue claims on consumer protection violations or fraud on state courts.

So we have the issue of fines left unclear, the issue of liability left unclear and the issue of mandating principal reductions left unclear as well. So this second term sheet will not include any of the most important issues in a settlement.

Meanwhile, the SEC plans to subpoena JPMorgan Chase and Credit Suisse over mortgage backed securities, with the clear implication that massive fraud took place. At this point, enforcement actions over bad mortgage bonds look much more likely than enforcement from the state AGs and federal regulators. I would think that the $11.8 billion Bank of America, Wells Fargo, Citigroup and JPMorgan Chase have set aside for litigation of the issue have a lot to do with these deals.

As for the rest, I’ll throw in my lot with investors, state courts, the few Attorneys General out there willing to do their job and registers of deeds.

David Dayen

David Dayen