By Dave Clarke and Rachelle Younglai
WASHINGTON (Reuters) - A comprehensive settlement between U.S. authorities and banks over alleged mortgage servicing abuses needs to be reached quickly to help the housing market heal, Treasury Secretary Timothy Geithner said on Tuesday.
Geithner said such a settlement will help dispel legal uncertainty that has been plaguing mortgage lenders and clogging the foreclosure process.
"It is very important that we try to bring this to bed as quickly as we can," Geithner told the Senate Banking Committee. "I think all parties, not just the servicers, but the state AGs and the federal agencies have a strong stake in doing that."
A group of 50 state attorneys general and 12 federal agencies are probing bank mortgage practices that burst into public view last year, including the use of "robo-signers" to sign hundreds of unread foreclosure documents a day.
The negotiators are struggling to reach a single agreement on financial penalties and higher standards for banks handling troubled home loans.
A "global" settlement with the authorities would relieve a potentially large legal liability and reputational black eye for the banks, as they could face a myriad of lawsuits and fines without a universal agreement.
Geithner declined to discuss details of the talks.
Negotiations have focused on the top U.S. mortgage servicers, including Bank of America Corp, JPMorgan Chase & Co, Citigroup Inc, Wells Fargo & Co and Ally Financial.
Democratic Senator Jack Reed said the banks are facing a massive legal threat unless a comprehensive deal is reached. He cited the potential for numerous suits from state AGs, repurchase demands from bondholders who invested in billions of dollars in mortgage-backed securities, and lawsuits from individual homeowners.
"This would have, I would assume, a very deleterious effect in the marketplace and the standing of the companies that you're talking to right now," Reed told Geithner.
Many housing experts say home prices cannot recover as long as buyers believe a backlog of foreclosed properties remains poised to come on to the market.
Foreclosure tracker RealtyTrac reported that foreclosures in February were down 27 percent from the same month last year, bringing foreclosure activity to a 36-month low.
The report attributed a hefty portion of the decline to court rulings challenging banks' documentation, which have led banks to hold back on filing foreclosure cases.
CHANCES FOR GLOBAL DEAL UNCERTAIN
John Walsh, a top bank regulator, said earlier on Tuesday that U.S. federal and state authorities still hope to reach a single settlement proposal they can present to the banks over alleged abuses.
"We each have our own separate responsibilities and areas of jurisdiction, but to the extent possible we are trying to coordinate our actions," Walsh, acting head of the Office of the Comptroller of the Currency, told an American Bankers Association conference. "Whether this is possible remains to be seen."
On March 3, state attorneys general sent banks aspects of a proposed settlement endorsed by some federal agencies but not the OCC or the Federal Reserve, the main banking regulators involved in the discussions.
The 27-page document proposed changes to how the mortgage servicing industry operates and advocated reducing loan balances for struggling borrowers as a way to help them avoid foreclosure, a proposal banks have not supported in the past.
State and federal authorities continue to negotiate over the key aspect of any settlement: what fine or penalty banks will have to pay.
At least some of the officials who endorsed the proposal sent out earlier this month have been pushing for a fine of about $20 billion, which would be used in part to help struggling homeowners.
Speaking for the OCC, Walsh said, "I can say that the actions we take -- both remedial actions and penalties -- will be based on the findings of examinations we conducted at the eight large national bank servicers."
Iowa Attorney General Tom Miller, who is leading the states' probe of mortgage servicing problems, said last week that he hoped to have a settlement with the nation's biggest banks in the next two months.
Questions have been raised about whether the new Consumer Financial Protection Bureau is playing too large a role in settlement negotiations, especially in pushing for principal writedowns in troubled mortgages, because it won't assume its formal regulatory powers until July.
Geithner told the Senate panel that the consumer agency will not be a direct party to any settlement over mortgage foreclosure abuses, but is involved in designing new servicing procedures.
"The CFPB -- the Consumer Financial Protection Bureau -- does not currently have authority to administer penalties, and will therefore not be a party to any formal settlement with mortgage servicers," Geithner said.
(Reporting by Dave Clarke and Rachelle Younglai; Editing by Dave Zimmerman and Tim Dobbyn)