Fund to help victims of foreclosure mess?

Relief could be on the way for borrowers who were unfairly pushed out of their homes because lenders cut corners in the foreclosure process.

The banks are in talks with a group of state attorneys general about setting up a fund, paid for by lenders, to compensate homeowners, the Washington Post reports. The settlement would probably require that lenders do more to modify loans for struggling homeowners, rather than speeding into foreclosure, and would probably bar banks from initiating foreclosure proceedings while simultaneously negotiating a loan modification.

Earlier this fall, serious paperwork flaws came to light in numerous foreclosures by big lenders like JP Morgan Chase, Bank of America and Wells Fargo. That prompted calls for a nationwide foreclosure freeze, and triggered a high-profile probe by states' prosecutors.

Several key questions relating to the fund plan appear not to have been worked out. For instance, many of the paperwork problems were relatively technical in nature. So would the fund be open to any borrower whose foreclosure involved flawed paperwork of any kind, or only to those who wouldn't have lost their home had it not been for the flaws? (How many people fall into these categories is not known.) Also not yet resolved are the questions of who would decide which homeowners deserved to benefit from the fund -- the first of its kind in the mortgage industry -- and how much each lender would contribute to it.

Similar funds have been set up in recent years to compensate victims of the 9/11 attacks, the BP oil spill and the Virginia Tech shootings.

Establishing such a fund for the foreclosure mess could be a win-win, by satisfying the AGs that borrowers will get the aid they deserve, while also letting the lenders avoid costly litigation. "It is in everyone's best interest to get this settled and behind us," Bank of America CEO Brian Moynihan told a financial conference Tuesday.

(2005 photo of a woman who fought foreclosure: AP/Charlie Riedel)