By Shahien Nasiripour in Washington

Investors in US home mortgage securities will be forced to write down a ?substantial? amount of principal – up to $40bn – for distressed borrowers as part of a national settlement against leading US banks to resolve allegations of widespread foreclosure abuses, the Obama administration has said.

The move would act as a ?down payment? for future principal reduction, said Shaun Donovan, US housing secretary, during a weekend conference call with reporters.

The Obama administration, which recently announced the formation of a new state and federal unit to investigate alleged frauds involving home loans and mortgage-backed securities, intends to use the threat of litigation against large US financial institutions to extract additional aid for struggling borrowers, Mr Donovan said.

?We believe not only that bringing state and federal powers gives us the ability to create real accountability at a scale that we have not seen to date, but also . . . there is the opportunity to get very large scale relief . . . for families that have been victims of the crisis,? Mr Donovan said.

The housing secretary?s remarks signal an escalation on the part of

the Obama administration to secure lower monthly payments for troubled borrowers and reduced loan balances from banks and investors in mort-

gage bonds.

Mr Obama said at the weekend that the housing crisis has been ?the biggest drag on our recovery from the recession? and urged Congress to act on his proposal.

Even though the investigations would be focused on alleged wrongdoing by leading US financial institutions, such as the seizing of homes without proper documentation or misrepresentations by securities issuers, investors will have to shoulder part of the eventual settlement costs, according to Mr Donovan.

?That is a very good thing from my perspective,? Mr Donovan said. ?It was a significant point that I personally was focused on, and more broadly this settlement is trying to achieve.?

Mr Donovan?s plan will draw criticism from the banking industry

?We expect a substantial amount of principal reduction in private-label securities loans as a result of the settlement,? the housing secretary added. Home loans in so-called ?private-label? bonds lack government backing.

? The Financial Times Limited 2012