Vexed by Securitization Suit, Banks Pull Out of Mortgage Fraud Settlement Meeting

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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.

The big mortgage servicers, including Bank of America, Citigroup, JP Morgan and others, were scheduled to meet late this week with the State AG negotiators as part of a separate investigation. Those talks are aimed at a settlement that will address standards for handling past and future mortgages, massive penalties (reportedly as high as $20 billion), and a release from legal liability for the servicers in other mortgage matters.

The State AGs did not foresee releasing the banks from liability for the kinds of violations alleged in the FHFA suit. The AGs are focused on the relationship between the banks and borrowers, while FHFA is focused on the bundled, or securitized, mortgages sold by the 17 firms. The big banks apparently were hoping they would be exempted from suits alleging they fraudulently sold bogus mortgages to investors, knowing they were less safe than advertised.

The State AGs, led by Iowa AG Tom Miller, have been desperately trying to finalize their settlement for months. The FHFA suit only complicates that process. Spokespeople for several of the large mortgage servicing banks did not respond to requests for comment on the canceled meeting.