Obviously a refinancing initiative using an existing program, which may net $20 billion but not do much to arrest the foreclosure crisis, is more of a punt than anything as far as housing is concerned in the American Jobs Act. That’s Mike Konczal’s take as well. But the bigger news on the housing/foreclosure front was the final nail in the coffin of this increasingly farcical 50-state AG settlement. The banks are miffed about the FHFA’s lawsuit against them over representations and warrants on mortgage backed securities, particularly because the suit holds over 130 individuals responsible for the crimes, which is just not done. So these banks blew off the latest scheduled meeting with the AGs in a fit of pique.

The five biggest mortgage servicers have cancelled a planned negotiating session with representatives of the 50 State Attorneys General in apparent protest over a federal regulator filing suit against them, a source familiar with the matter tells TIME.

The banks canceled the meeting on Tuesday afternoon in protest over the announcement last Friday that the Federal Housing Finance Agency would bring a broad case against 17 firms, including those in talks with the State AGs. The FHFA, which oversees mortgage giants Fannie Mae and Freddie Mac, alleges the firms violated securities law by misrepresenting the value of bundles of high-risk mortgages they sold. FHFA did not say how much the case might be worth, but outside analysts have said it could potentially produce billions of dollars in compensatory damages from the firms.

Massimo Calabresi intimates that the FHFA suit has ruined the AG settlement, but that’s a bit of 20/20 hindsight. The settlement was already going nowhere well before the FHFA lawsuit. The banks want full immunity on everything, and enough AGs were unwilling to give that up that the two sides could never come together. What’s more, AGs couldn’t possibly release the banks from liability lawsuits from private investors, or even quasi-private ones like Fannie and Freddie.

This is just a hissy fit from the banks, and probably an excuse to end settlement talks that will not give them what they need. Indeed, the banks are probably searching for a Plan B at this point. They don’t want to have to give up a dime on robo-signing, conserving cash for the future legal fights ahead. Some banks, like Bank of America, are engaging in restructuring and firing of top executives, essentially to create a smaller and more focused operation. BofA is actually trying to get itself small enough to fail, because with their exposure they cannot afford to be too big. They plan to cut 30,000 jobs and significantly separate the commercial and investment banking sectors of the business.

Meanwhile, the lawsuits and the exposure keeps coming. In a major appellate court ruling in Florida, one of the most important foreclosure states, a foreclosure was reversed because LaSalle Bank could not prove the proper amount due and owing. Glarum v. LaSalle Bank is a huge ruling with broad implications. Here’s Abigail Field:

When foreclosing, the court said, a bank has to use evidence, not hearsay. In this case, the hearsay was LaSalle’s claim about how much the homeowner owed it–the bank’s “affidavit of indebtedness.”

What is hearsay? Split the word in two and it’s obvious: the witness hears something, and then says it to the court. Hearsay’s prohibited for a basic reason: you can’t trust it to be true, as anyone who has played “telephone” knows. The hearsay rule has a 500+ year pedigree, so it’s not possible that any lawyer or judge in Florida thought it was okay to use hearsay to win a case [...]

Ruling that LaSalle’s affidavit of indebtedness was inadmissible hearsay was unremarkable as a matter of law. But in a state where some judges have displayed pro-bank bias so powerful they don’t require the banks to follow the rules, the decision is stunning. In fact, banks are likely to be far more than stunned by it; they may be stopped in their tracks for a long time.

That’s because the affidavit represented normal business practice: have an employee look at a piece of paper, look at a computer screen, and sign. By rejecting Orsini’s affidavit, the court is forcing the banks to overhaul their basic foreclosure processes. Don’t be too sympathetic to those poor banks, however. The hearsay nature of these affidavits is obvious, and the only way banks could think it would be alright to use them would be to think they are above the law.

If applied broadly, this ruling basically shuts down robo-signing and forces the banks to completely change their broken servicing processes. More here and here.

So if you want to know why banks are nosediving, it’s because of the exact same problems that characterized the 2008 financial crisis. There are still massive housing losses in the system due to criminal fraud, and slowly but surely, the banks are being made to eat them.