First Posted: 02/ 2/2012 6:11 pm Updated: 02/ 2/2012 8:07 pm

Mortgage lenders would be encouraged to provide greater relief to borrowers who are in less need of help while offering scant assistance to the most troubled homeowners, under the terms of a proposed $25 billion settlement between the nation's five largest banks, attorneys general in nearly every state and the Obama administration.

According to a partial draft of the proposed settlement reviewed by The Huffington Post, banks would receive greater credit when they cut loan payments for borrowers who have more equity in their homes. Banks would have less incentive to assist borrowers who are severely underwater -- meaning that they owe the banks more than their homes are worth.

The proposed deal would give mortgage companies a pass on instances of illegal foreclosure practices involving under 1 percent of all of their loans, according to the draft.

Some consumer advocates familiar with the terms are expressing disappointment, pointing to the provision that encourages banks to focus help on less-troubled borrowers as evidence that the settlement will fail to deliver broad relief.

Roughly 1 in 5 American mortgages are now underwater. Housing experts have urged the Obama administration to craft a settlement that would write down outstanding loan balances on properties with high loan-to-value ratios, meaning those for which the borrower owes much more than the house is worth. Otherwise, they warn, large numbers of borrowers will have no incentive to continue making payments and simply relinquish homes to lenders.

"To really make a difference in the housing crisis, you have to assist high [loan-to-value] homeowners," said Diane Thompson, an attorney at the National Consumer Law Center. "Otherwise, at some point, they're all going to walk away from their homes."

The banks have long resisted calls to forgive large portions of loan balances and have been unwilling to absorb losses. The current settlement terms appear to satisfy the banks on this point, minimizing the pressure to hand out relief to severely underwater borrowers.

"That's in some sense what the banks wanted," said Thompson, calling the proposed terms "the price of getting the deal done."

The settlement aims to help underwater homeowners by requiring banks to lower these borrowers' payments -- by reducing interest rates on their loans, enabling them to refinance or by cutting their principal amount.

Under this proposal, the banks would collectively pledge to provide roughly $25 billion toward helping troubled homeowners. But the banks would receive greater credit toward satisfying the terms of the deal when they help borrowers who owe less than 175 percent of the value of their homes. Helping borrowers who owe more than 175 percent would qualify for less credit, according to the draft of the proposed settlement.

The settlement is expected to be announced by the White House sometime next week. The Obama administration has given state attorneys general until Monday to sign on to the deal, according to state officials who spoke on condition they not be named.

The settlement on the table is the product of more than a year of talks, a complex set of negotiations aimed at settling claims of wrongful foreclosure and other abuses by five major financial institutions -- Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial -- in the so-called robo-signing scandal. Banks have faced widespread accusations that they employed law firms that forged required signatures on millions of loan documents, resulting in wrongful foreclosures.

The Obama administration, confronting accusations that it has failed to pursue justice against the institutions responsible for a national foreclosure crisis, has been eager to secure a grand, headline-capturing deal involving every state and all the biggest lenders. But some key states -- not least California -- remain hesitant to sign on, arguing that the deal would hand out too much forgiveness in exchange for too little benefit for distressed homeowners.

The provision allowing banks to illegally foreclose on up to 1 percent of its mortgages is accompanied by a mechanism that would enable states to continue to prosecute such instances.

Under the draft seen by the HuffPost, states whose residents appear to be victims of illegal foreclosures could take such cases to a committee headed by North Carolina's banking commissioner, Joseph Smith. The committee would rule on whether the foreclosure was illegal, requiring the bank to fix any problems. Banks would be immune to civil fines for up to 1 percent of their loans.

Consumer advocates expressed concerns about that mechanism.

"Having an allowable erroneous foreclosure rate makes practical sense," said Melissa Huelsman, a Seattle attorney who represents homeowners in foreclosure cases. "But I don't like that the appeal has to go through a committee. With these bureaucratic committees, it can take months and months to get anything done. Meantime, what happens to the homeowners being harmed?"

Just for Larry, and because it is apparently a done deal now. Three years ago I said any bailout to the megabanks who knowingly gave out bad loans to unsuspecting borrowers (and incidentally set off the Global Financial Crisis) should be through homebuyers who would thereby keep their homes IN ADDITION to bailing out the banks. Instead Obama gave them, what, $700 billion they promptly spent rewarding the executive masterminds and buying up smaller failed banks instead of paying their debts. Now, finally, Obama is doing something for the homebuyers who've become increasingly desperate since: $25 billion to be handed out on an as-NOT-needed basis. The more you need help, the less likely you are to get it: The new American Nightmare.