Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), JPMorgan Chase (NYSE: JPM), and Citigroup (NYSE: C) Meet with State Attorney Generals

The mortgage crisis that began nearly three years ago continues to plague the banking industry, but the firms with the greatest exposure are seeking to expedite and remediate the issue as soon as possible.

Today, officials from Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), JPMorgan Chase (NYSE: JPM), and Citigroup (NYSE: C) met with state attorney generals to discuss foreclosure processes.The talks may lead to the banks taking more aggressive steps, which could include principal reduction and short sales to help struggling homeowners.

The firms present at the meetings represent the top five mortgage servicers, and are under investigation for their foreclosure practices. Reports surfaced last year that the banks may be processing foreclosure paperwork without proper review. As a result, some of the banks suspended their foreclosure practices to conduct an internal review. The same banks are also being criticized for not doing enough to modify loans for distressed borrowers who have seen their home values decline.

The Washington Post reports that the talks hing on principal reduction. As many homeowners took on mortgages during the housing bubble, the value of the home in today’s depressed market is far exceeded by the loan on the property. As a result many homeowners remain underwater, and the government wants banks to adjust principal balances to enable more fluid movement in the real estate market. If a property were to be foreclosed on, the sale price of that foreclosed property is more often ecliped by sales prices on short sales. As a result, they are preferred by neighborhoods for that reason. But the short-sale process, especially when the seller is an overwhelmed bank, can be more time-consuming than liquidating a foreclosed home.

For months, observers have said a negotiated settlement with the government would be the only way to resolve the foreclosure crisis that is now going three years. That appears more and more likely, but insiders caution that a final deal could still be months away. As struggling home owners continue to face falling home prices, selling homes has become increasingly difficult especially in the ‘sand states’. The State Attorney Generals will have their work cut out for them, negotiating with the banks saddled with bad loans to accept less money to close out loans. As the firms have only recently begun plans to begin issuing dividends again, loan losses could impact that ability, putting the negotiations in very difficult territory.