Analysis : Mortgage probe may open new path for housing relief

(Reuters) – A controversial weapon could be deployed soon in the U.S. fight against the housing crisis as states and top banks near a deal in their dispute over mortgage abuses — cutting the mortgage debt owed by homeowners.

Five major banks could be required to commit roughly $15 billion to reduce principal balances for struggling  homeowners and modify loans in other ways under a proposed deal to settle allegations linked to the “robo-signing” scandal.

That amount would be part of broader sanctions that could total $25 billion, small change for the giants of Wall Street but potentially sowing the seed for a new approach to tackling the housing crisis.

Settlement talks continue with the banks, state attorneys general and some federal agencies over foreclosure shortcuts and other abuses. A deal could be struck within a month, according to people familiar with the matter.

Much of the exact language has yet to be hashed out but it could provide for the first broad use of principal writedowns,  something economists and housing advocates say is a drastic but needed step to help set right the housing market.

Investors and the government-controlled mortgage finance giants Fannie Mae and Freddie Mac — which own around half  of all U.S. mortgages — have long resisted the idea.

There are concerns it could encourage some borrowers to stop paying in order to qualify for a reduction in their overall  mortgage. Fannie and Freddie’s regulator has been wary of allowing principal reductions, doing so would lower the value of the  assets held by the taxpayer-supported firms.

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