UPDATE 1-Mortgage writedown proposal advances in U.S. probe

* Principal reductions part of settlement proposal

* Bank fines still being negotiated
(Adds comments from Iowa AG’s office)

By Corbett B. Daly and Dave Clarke

WASHINGTON, March 4 (Reuters) – U.S. banks have been asked
to forgive some of the amount owed on troubled mortgages in a
proposal sent to them by state attorneys general and federal
agencies on Thursday.

The 27-page proposal is part of a broader effort to get
banks to agree to a settlement after they were accused last
year of taking possibly illegal shortcuts in some foreclosure
proceedings.

Banks were accused of using “robo-signers” to sign hundreds
of unread documents a day and maintaining sloppy mortgage
paperwork.

“What we envision is a set of requirements for how they
service loans and handle foreclosures,” said Geoff Greenwood, a
spokesman for Iowa Attorney General Tom Miller.

Miller is spearheading the 50-state attorneys general probe
into mortgage lenders’ foreclosure practices.

Greenwood said the states plan to meet face to face with
banks this month to hash out a deal.

U.S. regulators and a coalition of state attorneys general
are negotiating a settlement over the servicing problems with
the biggest mortgage lenders, including Bank of America Corp
(BAC.N: Quote, Profile, Research), JPMorgan Chase & Co (JPM.N: Quote, Profile, Research) and Wells Fargo & Co
(WFC.N: Quote, Profile, Research).

Federal agencies and the states have said they want a
single, comprehensive deal with the banks rather than a
smorgasbord of separate deals.

Whether that will happen is questionable.

The banking regulators involved in the negotiations were
not part of the proposal sent Thursday.

That proposal includes practices servicers would have to
follow when foreclosing on properties but does not include a
fine they also would have to pay, a matter that is currently
being negotiated separately.

The proposal would encourage servicers to do principal
writedowns to keep borrowers in their homes and provide a
single point of contact for borrowers in foreclosure
proceedings, according to Greenwood and another source familiar
with the plan.

Greenwood said the proposal has the support of the U.S.
Housing and Urban Development Department, the Justice
Department, the Federal Trade Commission and Treasury
Department staff setting up the Consumer Financial Protection
Bureau.

“These are terms that we who have signed onto these
documents have agreed to,” Greenwood said.

The federal agencies are working with banking regulators,
the Office of the Comptroller of the Currency, the Federal
Reserve and the Federal Deposit Insurance Corp, to craft a
broader settlement that would include fines on the banks but
there are disagreements over the size of the penalty, according
to people involved in the negotiations.

The news of the 27-page proposal being sent was first
reported by the Wall Street Journal.
(Reporting by Corbett B. Daly and Dave Clarke, Editing by Tim
Dobbyn and Matthew Lewis)