The Obama administration has significantly diminished a proposed homeowner relief program that initially aimed to force the nation’s five largest mortgage companies to reduce monthly payments for three million distressed homeowners, according to documents and people involved in the discussions.

The administration has shifted its focus to delivering lowered payments for as few as one million homeowners, according to sources that are party to the deliberations.

However, the pot of money the administration hopes to extract from the firms to fund those modifications — $25 billion — remains unchanged, these people said, partly to fund expensive loan modifications, partly as a function of the desire by some agencies to punish the firms for their mortgage practices.

The demise of the mortgage relief proposal would constitute a significant setback in state and federal efforts to resolve allegations of widespread legal abuses by major mortgage lenders. State law enforcement authorities have in recent months been in discussions with federal banking regulators and Obama administration officials to try to craft a settlement that could effectively close the books on complaints of wrongdoing that have been attendant to a historic surge in the numbers of American homes falling into foreclosure.

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Fraudclosure Term Sheet
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