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Banks Fight Mortgage Principal Reduction

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At the end of a day-long negotiation session over the foreclosure paperwork mess at the Department of Justice, Iowa Attorney General Tom Miller and Associate Attorney General Thomas Perrelli came out for a brief chat with reporters.

They essentially said nothing.

Miller: "We had a good first meeting with the banking and servicer industry- emphasis on good and first. It was a first meeting, it was a breaking of the ice, and that takes some time and is part of the process. The discussion was good—I think it was on a good level, given the exchange of ideas and rationale and principles. I think we have a long way to go—again emphasis on first meeting."

Perrelli: "Tom Miller is a fantastic partner, we’re lucky to be working together. I’ll echo what Tom said, I think it was a very productive first meeting, with serious discussion of a wide range of challenges and problems in the mortgage servicing industry."

The banks weren't talking, at least the representatives in the meeting weren't talking, nor were their spokespeople. But big bank executives have been commenting on the biggest sticking point in a potential settlement over foreclosure practices: Principal reduction.

Some of the State AGs, including the lead on the investigation, Miller, as well as federal regulators and administration officials appear to be looking toward principal forgiveness as the punishment the banks should pay. But as recently as last night, JP Morgan Chase's Jamie Dimon told reporters, "Yeah, that's off the table."

This morning the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) put out their quarterly "Mortgage Metrics Report" for Q4. It showed just 2.7 percent of modification made in the quarter by national banks and federal thrifts (that includes Fannie and Freddie) included any principal reduction. The banks did the vast majority of the reduction with Fannie and Freddie doing none. But principal reduction fell dramatically, over 60 percent from year ago as a modification tool, meaning banks are less and less inclined to do it.

I'm not exactly sure what will come out of these endless "negotiations" over the so-called "robo-signing" scandal, other than the banks trying to push foreclosures through and out of the system before any penalties come down the pike. The longer the negotiations drag on, the better for the banks and the worse for consumers. Federal regulators may come out with something sooner, given that they are less worried about the political ramifications of what they do than the state attorneys general.

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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