A handful of state attorneys general are taking a hard line with mortgage servicers by demanding loan modifications and principal reductions for those borrowers whose rights may have been violated by robo-signing.
All 50 states, as well as 39 state bank regulators, joined forces earlier this month to investigate whether servicers improperly submitted affidavits or other documents in the foreclosure process.
Lawyers representing some of the largest banks said a few attorneys general may break from the coordinated multistate effort and demand that servicers modify loans for borrowers already in the process of foreclosure.
Andrew Sandler, a co-chairman of BuckleySandler LLP, said servicers will rebuff attempts by individual attorneys general to make changes to loan terms since they are not related to the issue of robo-signing, the practice of endorsing affidavits without verifying the information or having a notary present.
"If the AGs seek loan modifications as a remedy for technical deficiencies, there likely would be litigation," Sandler said.
So far, an executive committee of 12 state attorneys general and three state banking regulators led by Iowa Attorney General Tom Miller has met just once through a conference call.
Geoff Greenwood, a spokesman for Miller, declined to discuss the internal deliberations.
"Because of the number of attorneys general involved, there will be different proposals and ideas, and that's part of this process, to come out with the best resolution possible for consumers and lenders," Greenwood said.
(Separately, Obama administration special adviser Elizabeth Warren told Dow Jones Newswires that the federal government would not attempt to take the lead on the forclosure controversy. See related story.)
Some of the inquiry letters sent by attorneys general to the top five servicers have asked for an evaluation of each servicers' foreclosure processes and an accounting of what went wrong.
A few have stipulated that foreclosures cannot go forward until the robo-signing issue has been fixed.
The letters also have requested the number of loan modifications offered to borrowers in a given state.
Some of the letters make clear that once a servicer is assured of being in compliance with state law, it can proceed with foreclosures.
But each state has made different requests.
"There's a lot of chaos," said Bennet Koren, head of the consumer financial services practice at McGlinchey Stafford PLLC. "There is no protocol for saying that if this is acceptable in the state of Hawaii, it's acceptable in Rhode Island."
Servicers maintain that most borrowers have been offered a loan modification so it would be highly unlikely they would repeat the process again, Koren said.
Housing counselors say a large number of borrowers have been denied modifications.
"There's an assumption that borrowers have already been through the process, and our experience does not bear that out," said John Taylor, the president of the National Community Reinvestment Coalition, a nonprofit housing advocate.
The issue could get complicated if more states sue individual servicers.
Ohio is the only state so far to file a civil fraud suit, seeking civil penalties of up to $25,000 per violation and restitution against GMAC Mortgage and its parent company, Ally Financial Inc., for the practice of robo-signing, which came to light during a deposition of a GMAC employee, Jeffrey Stephan.
"Regardless of the robo-signing issue, the attorney general has repeatedly stated that servicers need to step up and offer respectable loan modifications to borrowers who are facing foreclosure," said Kimberly Kowalski, a spokeswoman for Ohio Attorney General Richard Cordray.