The Bank of America settlement with investors on their legacy mortgage-backed securities issues may be coming apart. The Federal Home Loan Banks are now bolting from the deal, saying that investors deserve three times as much as the $8.5 billion settlement.

The home loan banks, which invested more than $8.8 billion in the mortgage-backed securities, are trying to get access to more information about the deal by joining the case and said a reasonable settlement could range from $22 billion to $27.5 billion or more [...]

The Federal Home Loan Banks of Boston, Chicago, Indianapolis, Pittsburgh, San Francisco and Seattle are seeking to intervene in the case and may oppose the settlement, according to court papers. The companies are among the 12 government-chartered FHLBs, which collectively raise cash in the bond market to lend to the banks and insurers that own them. Several of the FHLBs have outstanding suits over disclosures made by Countrywide that could continue under the terms of the broader settlement.

The home loan banks criticized assumptions in an expert report completed for Bank of New York Mellon Corp., the trustee for the mortgage-bond trusts. The report’s estimate of a reasonable settlement would rise to $22 billion to $27.5 billion if it assumed that Bank of America would have to buy back all loans in default and which breached representations and warranties, instead of 40 percent, the home loan banks said in their court filing.

“Modifying any of his other three assumptions would cause that range to rise much more,” the banks said about the expert.

This presents a problem for both BofA and Bank of New York Mellon, the trustee for the MBS, which is seen as not acting in the best interest of the investors.

The banks have a grand design of how they can get out from under the mess they’ve made of the housing market. First, they design deals like this to buy off investors on the cheap and get indemnity on the securitization side. Then they ink a broader deal with state and federal prosecutor, also for pennies on the dollar, to release liability on that side. At this point, only homeowners, who don’t have the legal firepower to keep up with the banks, would have a claim, and while there’s reason to believe that many judges will side with the homeowner, the banks obviously feel that’s trifling, and they can wear down their adversaries on that front. Meanwhile, they continue business as usual, with the same robo-signers, the same foreclosure frauds, the same servicer abuses, and they bull their way through the housing crisis, collecting record profits along the way.

The breakdown of this investor deal, then, would be a major blow to these efforts. So would the resistance from some Attorneys General to give up liability claims in the midst of their own investigations.

The mortgage servicers want protection from additional state and federal claims over their mortgage practices as part of reaching a settlement that may exceed $20 billion, according to the people, who declined to be named because the talks are private. The banks are seeking releases that go beyond servicing of mortgages to include lending and securitization of loans, one of the people said.

That effort has encountered resistance from at least two states. Delaware Attorney General Beau Biden and New York Attorney General Eric Schneiderman, who are investigating the bundling of mortgage loans into securities, don’t want their probes blocked by a broad settlement of liability [...]

Officials are seeking a settlement that sets standards for how the banks service loans, interact with borrowers and conduct foreclosures, according to terms proposed in March. They are also seeking monetary payments. Attorneys general from all 50 states announced their investigation last year after reports that banks were using faulty foreclosure documents.

“Attorney General Schneiderman remains concerned by any settlement agreement that would preclude state attorneys general from conducting comprehensive investigations of the mortgage crisis,” Danny Kanner, a spokesman for the attorney general, said in an e-mailed statement.

The banks did get a win, with some help from the Supreme Court, on a mortgage-bond deal, and they may be able to hold off investors using those tools. But Schneiderman, at least, seems serious, and without New York on the deal, you don’t have a liability release.

When you look at the grand design here, it’s important to understand that it’s being orchestrated by people who crashed the financial industry just a few years ago. They may have been saved by a pliant political system, but it doesn’t mean they’re infallible. And this time, their impediments are different and perhaps not as bendable.