We’ve suggested that a huge wildcard in the on-going foreclosure fiasco is the response of the 50 state attorneys general. One outcome is that they will seek some sort of global settlement based on the idea of forced modifications, essentially “cram downs.” Sheila Bair, for example,  has proposed a global solution that would give banks legal protection from lawsuits in exchange for extending at least a 25 percent reduction in the monthly mortgage payment. That in essence is a cram down. BlackRock has recently come out in favor of cram downs.

But the banking industry is letting it be known it will fight such terms. The industry has fought this battle before, or something quite close to it. Last year, a bankruptcy bill, sponsored by Sen. Richard Durbin, sought to give bankruptcy judges the power to grant reductions in mortgage payments to help borrowers stay afloat. It seemed logical to some. A measure actually passed the House but stalled out in the Senate. As of now, the attorneys general have not tipped their hands, but a whole lot is riding on their deliberations.

Already we’re seeing some forced modifications. An article from Daily Finance notes the case of one lagging mortgage debtor and Wells Fargo. The bankruptcy judge asked to see a servicing agreement, but the bank couldn’t produce and the judge disallowed the bank’s claim for unpaid mortgage payments and fees. The decision was upheld on appeal, and Wells Fargo dropped it. This is a case of significant modification, though it’s unclear if the debtor eventually got back on track with payments.

Is the best solution to the backlog to let the courts work through each case? We’ve noted that judges have such power when it comes to second homes and other property. They had the power to modify mortgage of primary residences until 1978 and in some cases until 1993.