Deal on foreclosures stalls over New York inquiry into banks

Investors' hopes that US banks could be close to ending years of legal uncertainty, and billions of dollars of legal liability, over their mortgage operations have been dealt a setback, after splits emerged between state officials negotiating a potential court settlement.

New York's attorney general, Eric Schneiderman, has been thrown off the committee of state prosecutors which has been negotiating a deal for the past 10 months, after he refused to agree to give banks broad immunity from future prosecutions.

Numerous state attorneys general had launched investigations into banks' foreclosure practices after revelations in 2009 and 2010 that banks were often signing off on repossessions without properly examining the paperwork, using so-called "robo-signers". It turned out that paperwork was often lost or incomplete, raising doubt over the legal basis for many of the foreclosures.

The chaos was partly the result of lax lending practices in the run-up to the credit crisis, in which mortgage companies encouraged or turned a blind eye to fraud by borrowers, and the complexity of the securitisation process, by which these sub-prime loans were sliced and diced into new investments for sale on Wall Street.

Bank investors are resigned to years of expensive litigation between different companies in the mortgage chain and from regulators, federal agencies and state prosecutors.

But the talks with state attorneys general appeared to hold out the hope of removing a significant chunk of that legal uncertainty.

The negotiations broadened to include federal government agencies, and began to focus on using about $20bn (£12bn) from a settlement of the robo-signer charges to provide relief to struggling homeowners, in return for indemnifying banks against future prosecutions.

The talks appear to have stalled, however, on the question of how broad that indemnity would be. New York is one of the states investigating banks' securitisation practices before the credit crisis, and Mr Schneiderman says he must be allowed to continue those inquiries regardless of any settlement of banks' more recent misdeeds.