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The Obama Administration is pushing for a settlement agreement with the nation’s largest banks for their role in mishandling the mortgages and foreclosures of borrowers and homeowners. The deal would require lenders to pay penalties for improper foreclosure filings and provide a fund to help people refinance their mortgages and even make principal reductions. Bank of America, JPMorgan Chase, Wells Fargo and Citigroup are the main targets for the U.S. Department of Justice, with each paying billions in cash penalties and refinance funding. Critics of the plan feel the Obama Administration should be focusing not on broad penalties that weaken an entire industry, but on fining those who specifically broke the law. For more on this continue reading the following article from TheStreet.

The 50 state attorney generals are in the home stretch of a $25 billion settlement with the largest mortgage loan servicers according to a an FBR Capital Markets report.

According to FBR's Washington contacts, "the Obama Administration, especially Housing and Urban Development Secretary Shaun Donovan, has stepped up efforts to come to a settlement," along with the U.S. Justice Department, " on behalf of claims related to FHA loans." Attorneys General Tom Miller (D-Iowa) and Lisa Madigan (D-Ill.) continue to lead the negotiations, with New York Attorney General Eric Schneiderman continuing to oppose a multistate settlement.

According to the report, the major remaining hurdles to the settlement -- which will include penalties for improper foreclosure filings, as well as large outlays for principal reductions to facilitate mortgage loan refinancing -- are "to convince California Attorney General Kamala Harris that the deal is large enough and provides enough political cover to sign onto," and "to convince the servicers, especially Bank of America (BAC), that the liability release is worth the penalty it will be paying."

FBR said that the negotiations have entered into a "critical period where either a deal will be struck within the next 4-6 weeks or will likely dissolve into one-off settlements," according to unnamed Washington sources.

According to the report, the settlement will include $5 billion in cash penalties and "a $20 billion fund for modifications and refinances of underwater mortgages," with each servicer creating "a modification and refinance fund [with] a three-year time period to process enough modifications to reach their target."

Bank of America and JPMorgan Chase (JPM) are on tap for total penalties of $7.5 billion apiece, including $1.5 billion cash penalties for each company, and $6 billion each to fund refinancing deals and mortgage modifications.

For Wells Fargo (WFC), the cash penalty will be $1 billion and the refinance and modification portion will be $4 billion.

Citigroup (C) and Ally Bank are each looking at a $500 million cash penalty and a $2.5 billion refinance and modification fund of $2.5 billion.

According to FBR, in return for the settlements, the servicers will "receive a release from future liability related to state attorneys general actions related to servicing and loan originations."

The mortgage loans that would be eligible to be modified or refinanced with principal reductions under the proposed settlement would be "held in portfolio or where the bank is the servicer of a first, but holds the second in portfolio." This would cover a portion of loans that were originated by banks and mortgage companies but sold to Fannie Mae (FMCC) and Freddie Mac (FMCC), some of which will soon be able to refinance entire "underwater" loan balances, through President Obama's expansion of the Home Affordable Refinance Program, or HARP.

For investors holding or considering investing in shares of the nation's largest banks, FBR said that while a 50-state settlement would be ideal, "this is a settlement that would take much of the concerns related to robo-signing off of the table," and with the bulk of the settlement money going to loan modifications and refinances, the settlement would be "an opportunity for servicers to reduce some of the risk from their balance sheets."

Frank Mayer -- a partner in the Financial Services Practice Group of Pepper Hamilton LLP in Philadelphia -- sees the Obama Administration's actions to push the settlement as "another example of the Administration missing an opportunity by not taking direct and open leadership over the issue."

Mayer added that "the Administration's goal should not be hammering an entire industry and the associated investors to pay out mass payments through federal government action, but to focus retroactively at specific bad actors based on the law when the actions occurred, based upon violations of then existing law... not what we now wish the law to have been."

This article was republished with permission from TheStreet.