Settling the mortgage mess

A slew of state attorneys general banded together 11 months ago to try to extract a multibillion-dollar settlement from banks for the way they mishandled foreclosures. The prospects of a deal have been clouded, however, by dissension in the AGs’ ranks. On Friday, California Atty. Gen. Kamala Harris became the latest to drop out, announcing that she would pursue her own investigation. Top prosecutors in half a dozen other states, including New York, Nevada and Massachusetts, have already pulled out of the multi-state talks, saying they were concerned that the group wasn’t demanding enough from banks in exchange for settling the states’ claims.

We’re all for holding lenders and loan servicers accountable for the illegal shortcuts they’ve taken and misrepresentations they’ve made, and Harris’ frustration with the slow pace of negotiations is understandable. But she and her counterparts should remember that the banks’ misbehavior isn’t responsible for all the problems in the housing market. It’s not fair to expect the banks to compensate every homeowner whose house has lost value, even if lenders’ freewheeling practices helped cause the crisis.

There still are many homeowners in houses they can’t afford, and it takes far too long to figure out which defaulting borrowers can (and should) be helped and which cannot. In addition to fairly compensating those who were directly harmed, the AGs’ goal should be to make sure struggling borrowers are treated reasonably, rationally and efficiently — something that overwhelmed lenders have failed to do. The longer it takes the AGs to achieve results, the fewer people there will be left to help.

This criticism cuts both ways. Banks have to make significant concessions to end the threat that prosecutors will sue them for violating state laws. Even a borrower who has no chance of avoiding foreclosure has rights, and banks ignored them in their sloppy and corner-cutting responses to the skyrocketing number of defaults. There’s also a good argument to be made that banks violated consumer protection laws by making promises they didn’t keep about loan modifications for troubled borrowers.

The settlement negotiations present an opportunity to clean up the tortuous process of modifying mortgages once and for all. That includes enabling more borrowers in hardship to write off some of their debt, making it easier for troubled borrowers to sell homes that are worth less than their mortgages, and ending the indefensible practice of lenders foreclosing on homes while the owners are negotiating with them for more affordable loans.

Harris hopes that some of these reforms can be accomplished through the Legislature, but lawmakers have been reluctant to do more than just delay foreclosures. A better result would be if her withdrawal prods the banks to offer a multi-state settlement that works for California as well.