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A snag in deal to help troubled homeowners

By Jennifer Liberto, senior writer

WASHINGTON (CNNMoney) -- For the first time, state attorneys general, regulators and the five largest mortgage servicers are expected to meet this week in Washington to resolve allegations that thousands of homeowners were foreclosed on wrongly.

Iowa Attorney General Tom Miller -- a leader among the states involved in a probe into mortgage servicers' foreclosure practices -- has said he hopes to have a done deal to help homeowners by early May.

But making that timeline looks increasingly difficult, according to sources close to the negotiations -- especially since the discussions officially begin on Wednesday.

One of the major sticking points is an effort to get the five largest mortgage servicers to consider reducing the principal on some loans held by underwater homeowners.

Regulators and attorneys general sent the banks a 27-page offer, or so-called "term sheet," in early March that included ways in which homeowners could more easily get mortgage modifications. Among the ideas was a reduction, in some cases, in the principal amount that they owe on their house.

However, seven state attorneys general have written letters to Miller saying that they think the opening offer goes too far. They specifically don't agree that banks should be forced to reduce principal on underwater loans. The state officials who wrote letters represent Oklahoma, Alabama, Nebraska, Virginia, Texas, Florida and South Carolina.

"We remain troubled that the term sheet proposes to impose heightened loss mitigation requirements and forced principal reductions on mortgage servicers," stated a March 22 letter signed by Attorneys General Kenneth Cuccinelli of Virginia, Greg Abbott of Texas, Pam Bondi of Florida and Alan Wilson of South Carolina.

A spokesman for the Iowa Attorney General said it's no surprise that some attorneys general would have different opinions on a proposed settlement. He played down concerns that controversy about the writedown of mortgage principal would hold up the deal.

"It's a significant issue, but a little more attention has been put on it than needed," said Geoff Greenwood, Miller's spokesman. "It's one component of a much broader term sheet, with a raft of proposals to fix a dysfunctional system."

On one side of the negotiations are attorneys general and federal agencies. On the other side are the mortgage servicers that comprise 59% of the market. The five largest servicers are Bank of America (BAC, Fortune 500), Wells Fargo (WFC, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Citigroup (C, Fortune 500) and Ally Financial (GJM), according to Inside Mortgage Finance.

Banking groups representing those involved declined to talk about the settlement discussions underway. However, the banks are expected to push back against any measure that would require them to write down mortgage loan principal. To top of page

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