by Calculated Risk on 12/14/2011 07:07:00 PM

I missed this last week from Adam Belz at the Des Moines Register: Iowa AG says mortgage settlement should be done by Christmas (ht Kevin)

Iowa Attorney General Tom Miller said Thursday a settlement between almost all state attorneys general and the five largest mortgage servicers should be finalized before Christmas, with or without California.

The deal, which Miller has been trying to negotiate since March, would release the five servicers – Ally Financial, Bank of America, Citigroup, J.P. Morgan Chase, and Wells Fargo – from legal claims on past home loan servicing and foreclosures. The deal would not prohibit individuals from suing the banks, or government prosecutors from suing banks over issues related to the packaging of home loans into mortgage-backed securities.

In return the banks will agree to pay for what Miller calls “substantial principal reductions” for homeowners who are underwater, and agree to a set of mortgage servicing standards, interest rate reductions, and cash payments to some homeowners who’ve alrady gone through foreclosure.

And from Bloomberg today: Ex-Cuomo Aide Said to Be Among 4 Foreclosure-Monitor Candidates

Steven M. Cohen, who was the governor’s secretary, is one potential foreclosure monitor, according to the person, who declined to be identified because the negotiations are secret. That person said North Carolina Commissioner of Banks Joseph A. Smith Jr. is also a candidate, as did a second person who asked not to be identified.

Selection of a monitor is one of the final issues to be worked out between the banks and state and federal officials, said the people. Selection of the monitor is a key issue for the regulators because success of the agreement will largely depend on his or her work, one of the people said.

Other candidates are Nicolas P. Retsinas, a former assistant secretary of the U.S. Department of Housing and Urban Development, and ex-Federal Deposit Insurance Corp. Chairman Sheila Bair, one of the people said.

The discussion of possible principal reductions is too optimistic. They are discussing something like a $25 billion settlement (including California) and only a portion would be for principal reductions. Currently, according to CoreLogic, homeowners with negative equity (including 2nd liens) are an aggregate $699 billion underwater. Even if the entire settlement went to principal reductions, the average underwater homeowner would only see a few percent of their negative equity eliminated.

The major impact from this settlement on the housing market would be to reduce the number of seriously delinquent loans - either by modifications (including principal reductions) or through foreclosures. Currently, according the LPS, there are 1.76 million loans 90+ days delinquent (not in foreclosure) and another 2.21 million loans in the foreclosure process. I'd expect those numbers to decline fairly rapidly next year following a settlement.