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States to make decision on agreement with banks that would settle foreclosure probes

They've been here before, but this time, they say it is for real. After a yearlong haul that has featured numerous false starts, federal and state officials aim to wrap up this week a multi billion-dollar agreement with five major banks to settle probes of alleged foreclosure abuses.

State attorneys general must indicate by Monday whether they are signing on to the deal, said one person familiar with the negotiations, a key test of whether banks and federal officials will be able to wrap up a deal. The Monday cutoff marks a step back from the previous deadline of last Friday—a delay that is emblematic of what has been a vexing process.

Government officials have been aiming for a deal valued at $25 billion in loan write-downs, refinancings and other homeowner assistance, as well as cash penalties, with Ally Financial Inc., Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co.

Ally said it continues to "participate in discussions in hopes of reaching a reasonable solution." Representatives for the other banks declined to comment.

A settlement with additional banks could increase the deal's value by $4 billion, said another person familiar with the negotiations.

Some officials have been striking an optimistic note of late. "It will be finalized, I would expect, in the coming days," said Shaun Donovan, secretary of Housing and Urban Development, last week. He has taken a leading role in the talks.

Still, several sticking points remain, including whether California will sign on. California is the state with the most homeowners who owe more than their homes are worth and, as a result, stands to benefit more than any other state from the agreement. Negotiators have offered a commitment that a certain portion of the deal's benefits go to California to secure the participation of state Attorney General Kamala D. Harris, who left the talks in September. That deal could upset other attorneys general who haven't been able to secure similar terms. A spokesman for Ms. Harris declined to comment.

A risk is that attorneys general in other hard-hit states such as Florida balk at the terms. Florida Attorney General Pam Bondi could play a key role in determining whether other Republican attorneys general sign on to the deal. "Attorney General Bondi remains involved in the settlement discussions in order to reach the best resolution for Floridians and all Americans," said a spokesman for Ms. Bondi.

When details of the proposed settlement were first reported nearly a year ago, banks loudly objected to key elements. But banks in recent weeks have been keen to finalize the settlement in order to reduce their potential legal exposure.

A $25 billion national settlement would include $1.5 billion in cash payments to foreclosed borrowers. Borrowers are expected to receive roughly $1,500 each, but the actual amount will depend on how many people file claims, people familiar with the deal said.

The largest chunk of such a deal—roughly $17 billion—would represent the value of principal reductions and other benefits for financially distressed homeowners. Banks would have to meet 75% of these obligations in two years and meet all of them within three years to avoid bigger penalties.

Negotiators believe banks will focus on cutting balances on loans they own, both because they would receive more credit toward the $17 billion and because of limitations in their contracts with investors who bought mortgage-backed securities.

The settlement won't bar banks from reducing the principal on loans held by private investors if such write-downs are permitted under contracts that govern those deals. Bank of America, for instance, in 2008 said it had "delegated authority" to rework troubled Countrywide loans packaged into securities held by investors. The bank's 2011 agreement with Countrywide bond investors, if it wins court approval, would give the bank more authority to write down loan balances, provided the action is in investors' best interest in long run.

Click here to read more on this story from The Wall Street Journal.