The $26 billion 'robo-signing' settlement with five major servicing banks announced Thursday morning could yield nearly $35 billion in principal reductions, according to Housing and Urban Development secretary Shaun Donovan.With less than $20 billion of the settlement designated to principal reduction and refinancing underwater borrowers, secretary Donovan told reporters that the banks will not receive a dollar-for-dollar credit for reducing the principal amount of each loan.

He noted that a bank will not receive a full credit (toward the settlement figure) on loans that are seriously delinquent and not fully collectable.

"We are not going to give them a dollar of credit for writing off a dollar" of those loans, the secretary said at the robo-signing settlement press conference.

For now, the deal involves the nation's five largest residential servicers: Bank of America, Wells Fargo, JPMorgan Chase, Citigroup, Ally Financial. (See related stories on Web site for the full details of the settlement and comments by MBS analysts from Amherst Securities Group and Barclays Capital.)

In terms of actual principal reductions, "It's in the neighborhood of $35 billion," Donovan said Thursday morning.

California attorney general Kamala Harris estimated that her state's portion of the settlement will lead to $12 billion in principal reductions or short sales.  In total, it could help 250,000 Californians who are underwater and delinquent on their mortgages.  "California families will finally see substantial relief after experiencing so much of the pain from the mortgage crisis," Harris said.

Harris' office released details of the deal as it pertains to California homeowners just before the press conference announcing the deal.

The HUD secretary noted that the principal reductions are largely targeted at loans held in the banks' portfolios – excluding Fannie Mae, Freddie Mac or FHA loans.

Donovan noted that BofA has agreed to employ principal reduction in seasoned Countrywide Financial Corp. (CFC) loans, including notes that are part of private label securities.

The bank – which is in the process of slashing its presence in mortgage banking – has agreed to solicit all CFC borrowers and engage in "deeper" principal reductions on such loans. B of A bought CFC in August 2008.  

Under a separate settlement with PLS investors, BofA has already agreed to compensate PLS investors.

"The vast majority of private-label securities loans that are reduced in principal will be the old Countrywide loans and investors are being compensated," Donovan said.

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