For some reason, state Attorneys General are acting like they’re still going to reach an agreement with the banks on a foreclosure fraud settlement. Maybe if they had a credible threat of real damage to the bank, this could happen. Maybe if they were backed up by federal regulators. Maybe if we reached a stage where enough lawsuits in the pipeline promised real pain for the banks if they continued to ignore the systemic problems. Maybe then. But we’re not there yet on all counts. So we keep talking about homeowner’s funds that may never come to pass, and how to allocate money that the banks will never agree to give.

One option, said people with knowledge of the talks, would be to use a portion of the money to write down the principal balance for some beleaguered homeowners — a controversial approach that, bank representatives argue, raises questions of fairness and poses logistical hurdles for the industry.

Another option would be to dole out part of the funds to an array of state-run aid programs, mediation services, foreclosure hotlines and other efforts to help homeowners. But that approach also presents questions about how to allocate the money fairly and who would make that decision.

Other questions remain, such as how much in penalties each individual bank would have to pay and whether some of the money also will be set aside to compensate homeowners who suffered abuses such as wrongful foreclosures.

I don’t see two sides negotiating here. I see one side guessing what would be palatable to the banks, and the banks basically shrugging and agreeing to keep meeting as long as the negotiations move in their direction, without ever agreeing to anything.

Meanwhile, it’s far more interesting to see how Bank of America is dealing with their lingering foreclosure problems, and the legal challenges from the Countrywide purchase.

Bank of America plans to shrink its $850bn portfolio of troubled home loans by about half over the next three years as it seeks to quicken the pace with which it resolves problems related to the housing crisis and its disastrous purchase of Countrywide Financial.

Terry Laughlin, who is spearheading BofA’s mortgage modification and foreclosure programmes, told the Financial Times he had been given leeway to act quickly to tackle the growing number of bad loans that threaten to overwhelm the bank’s overall performance and tarnish the reputation of Brian Moynihan, its chief executive.

“It’s a classic divide and conquer strategy,” Mr Laughlin said.

“We are isolating the problems and quickly identifying the resources we need to fix them.”

Bank of America made what amounts to a “bad bank” earlier this year, isolating bad mortgages originated by Countrywide. They want to sell the loans, some of which they own but most of which they service, or modify them. The bad bank officials are talking about a 30-day decision process with a single point of contact to determine eligibility for a temporary mod. This would probably be an interest-only reduction, maybe for a couple years. I don’t see it as a whole lot different than a teaser rate. It certainly allows BofA to receive payments from borrowers for a little while, but it’s mainly another round of extend and pretend.

The mortgage mess has cut into the stock price of BofA and other banks, which is really the only way that they will allow their borrowers any relief. BofA is in perhaps the worst shape in this regard, sagged by the weight of the Countrywide business. A smart investigation could exploit this, reveal serious inadequacies and violations of law and force a consumer-friendly solution.

That’s not what we’re getting.

David Dayen

David Dayen

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