Anyone who was hoping for a quick settlement to the multi-prong probes of foreclosure practices by big banks and lenders has been sorely disappointed for months. When the state attorneys general opened their probe, many thought that a settlement would soon follow, creating the necessary guideposts and standards for the foreclosure and modification processes. And that would pave the way for banks to finally work off their massive backload of foreclosures. But we're still wondering how long will this take? 

Executives from Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally have gathered in Washington with various state and federal officials, but it's clear that a settlement, after all these months, is still elusive. I think we'll get one, but it will take months. And the eventual deal may be one that out of necessity reflects a spectrum of opinions. It's fair to say that on the regulatory side, the coalition has fractured a bit along political lines. A small group of Republican attorneys general are concerned that the regulators are overreaching, while at least one Democrat is concerned that the process does not do enough to protect homeowners. 

Looming over all of this is the imminent release of a report from the Federal Reserve, the OCC and other federal regulators. The report will likely reinforce what we already know, that banks' were wholly unprepared to handle the flood of foreclosures and embraced shockingly lax, contradictory and illogical practices that took some customers for a very wild ride. We've seen countless examples of this; more than a few state and bankruptcy judges have been shocked as well. The report will pave the way for monetary fines that will be separate from the settlement discussions now underway. 

The two sides agree on some things: the need for a single point of customer contact, for an end to dual modifications and foreclosure proceedings, for a better system of checking on the status of proceedings and the like. It will be interesting to see if MERS is addressed. 

The real sticking points turn on forced modifications and short sales and anything that results in the bank essentially forgiving principal. This is where attitudes harden. 

The concept of moral hazard has reared its head. While many banks are loathe to admit that they suffer such a hazard when it comes to "too big to fail" issues, they are willing nevertheless to invoke the harms of moral hazard at a personal level. That is, they argue that more homeowners will essentially default on purpose to get a sweet principal reduction deal. 

No doubt this is happening. But is it happening so much that principal reductions should not be allowed? These are issues that will be discussed. My sense is that you could craft a proposal that would allow principal reductions with enough checks built in to make sure financially healthy homeowners cannot game the system.