Banks, not Attorneys General, have become the major sticking point on a foreclosure fraud settlement, as they seek assurances that they protect themselves from future lawsuits.

Bank concerns reached fever pitch on Friday when the New York State attorney general’s office sued Bank of America, JP Morgan Chase and Wells Fargo, accusing the banks of deceptive and fraudulent use of a private database used to register mortgages.

“I think it’s fair to say that the banks are becoming an obstacle to completing this settlement now,” said the source, who spoke on condition of anonymity [...]

Bank executives argue that New York attorney general Eric Schneiderman is using the lawsuit to go after claims already covered under the settlement, said the source. JP Morgan Chase, Ally Financial, Citigroup and Wells Fargo declined to comment. Bank of America could not be reached for comment.

What it looks like to me is that the state and federal regulators negotiating the deal gave Schneiderman the go-ahead to file his suit against MERS and three banks. Then the banks found out about it and went nuts. So they’re trying to extinguish that lawsuit, which given the PR nightmare that would entail for Schneiderman, seems impossible at this point. Add to this the fact that Schneiderman’s office has scheduled a 6pm press conference to make a statement of some sort on the settlement. I cannot imagine that this spat will be settled by then.

Meanwhile, activist groups, which mostly cheered the appointment of Schneiderman to the state/federal task force on securitization and origination issues, are back to slamming the settlement as inadequate and weak.

The precise size of the deal hinges largely on the participation of California, whose attorney general, Kamala Harris, has called previous proposals “insufficient,” saying that the relief offered would not enable enough of the state’s homeowners to stay put and would “excuse conduct that has not been adequately investigated.” Officials close to the negotiations said Monday that while California has continued to withhold its support, Harris still could sign on to the settlement if several concerns are addressed, including the extent of legal immunity that banks would get and the process for determining which homeowners would receive help.

Still, some liberal groups and consumer advocates have argued that the expected terms amount to little more than a drop in the bucket, given the size of the housing crisis. Millions of homeowners remain either in foreclosure or are badly delinquent on their mortgages, and the pending deal would reach only a fraction of them.

For months, such groups have urged the Obama administration to undertake deeper investigations into mortgage-related misdeeds and to push for a much larger settlement later than rush into a less substantial deal now. The groups also have been worried that officials might let banks off the legal hook with little more than a slap on the wrist.

For instance, the group Campaign for a Fair Settlement issued a statement over the weekend saying it was “deeply concerned” about the push to finalize the current deal. AFL-CIO President Richard Trumka said recently that “a sum significantly larger than the rumored $25 billion is needed,” given the $750 billion in “negative equity” that exists from borrowers who owe more than their homes are worth.

Among those with concerns about adequacy, California AG Kamala Harris has led the way in trying to ensure more relief. And other AGs have jumped on that bandwagon, beyond New York. According to HUD Secretary Shaun Donovan, there are multiple states working on side deals that would guarantee some level of relief for homeowners. Reports emerged today that
Florida is one of those states seeking a side deal. We know that Massachusetts, Nevada, Delaware and Arizona have not signed on yet either. Between Nevada, Arizona, Florida and California, you have the four “sand states” with the most foreclosures – and presumably the most exposure to foreclosure fraud. And between Delaware and New York, you have the two states from where all the securitization trusts originated.

There’s been some pushback on half a deal being better than none at all. R.J. Eskow has a good scorecard as far as that goes. If the only problem was working out the side deals, I’d say that this would get done before the end of the week. But if banks are trying to stand down Schneiederman’s MERS lawsuit – and presumably others – that could unravel the deal.