By Dena Aubin

NEW YORK (Reuters) - Wells Fargo Bank breached a nationwide 2010 legal settlement involving adjustable-payment mortgages, a federal judge ruled, finding that the bank did not properly evaluate homeowners who applied for help to avoid foreclosures.

In an order on Wednesday, U.S. District Court Judge Richard Seeborg in northern California told Wells to meet with plaintiffs and find a way to remedy its violations, including steps to let some homeowners reapply for loan assistance.

Tom Goyda, spokesman for Wells Fargo, the largest U.S. mortgage lender, said the bank is reviewing the decision and will be working to provide additional information requested.

"We're quite pleased," said Jeffrey Berns, lead counsel for homeowners. "I don't know whether this is going to prevent foreclosures but it is certainly going to open (Wells) up to claims for damages from class members."

The decision is the latest twist in a long-running dispute over the settlement, which resolved complaints about "pick-a-payment loans." Wells inherited a large portfolio of these loans with its 2008 acquisition of Wachovia Corp.

The loans gave borrowers the option to initially pay less than the interest due, but the escalating payments that came later contributed to waves of home foreclosures in the 2007-2009 housing crisis, which threw the country into recession.

Plaintiffs' lawyers for years have argued that Wells was not complying with its agreement to grant loan modifications potentially worth up to $2.7 billion to homeowners who took out the loans. The modifications were an important piece of the settlement, which also called for Wells to pay $50 million to class members.

In court filings, plaintiffs' lawyers said Wells was not using proper methods to determine whether homeowners were at imminent risk of default and thus qualified for assistance under the settlement.

The lawyers said thousands of homeowners were denied mortgage assistance because Wells used the wrong methods to gauge their financial hardships.

In Wednesday's ruling, Seeborg chided both sides, saying they "seem to have almost no idea what, exactly, they agreed to more than four years ago."

He concurred with plaintiffs that Wells breached the agreement by using "evolving and perhaps ill-defined standards" in weighing applications for loan modifications.

He told both sides to present joint or competing proposals for correcting the settlement violations within two weeks.

The case is In Re: Wachovia Corp Pick-A-Payment Mortgage Litigation, U.S. District Court, Northern District of California, No 09-md-2015

(Reporting by Dena Aubin; Editing by Kevin Drawbaugh and Grant McCool)