Negotiators struggling to settle charges against five banks stemming from the so-called "robo-signing" foreclosure scandal are eager to get California Attorney General Kamala Harris back on board for a $25 billion deal.

Harris has walked away from the federal-state negotiations, saying there's too little benefit for Californians while banks would get a pass on years of questionable practices.

Nearly four years after the housing bubble popped, Harris has put California at the center of the debate over how best to punish the lending industry for abuses and offer relief to struggling homeowners.

Critics like Harris say the proposed settlement will only help a fraction of the 2 million underwater homeowners in California and gives banks too much of a say over whether they do principal reductions, which help keep homeowners in their homes, or short sales, which end with the homeowners losing their house. They say the banks' wrongdoing should be more fully investigated.

Those who are putting together the agreement say it breaks new ground by requiring banks to write down the principal on underwater loans and incorporates important loan-servicing reforms that would be backed by a court order and supervised by a court-appointed monitor.

California, the state hardest hit by the subprime housing collapse, could lose "billions" if it opts out of the settlement, they say.

A multistate deal without California would be difficult, though a spokesman for lead negotiator Iowa Attorney General Tom Miller says the other states may go ahead without it.

On Thursday, another skeptic about the deal, Massachusetts Attorney General Martha Coakley, filed her own robo-signing lawsuit against five major banks. Coakley has also been critical of the multistate negotiations.

The matter poses political risks for Harris, who won the job by a narrow margin last year. If she stays out of the deal, she will displease the White House. If she rejoins it, she will anger the progressives who helped get her elected.

The emotional and politically volatile investigation touches millions of Californians who have either had their homes foreclosed or who have underwater mortgages or problems modifying loans.

"People want to see the banks held accountable," added Becky Bond, political director of CREDO Action, a progressive advocacy group with 400,000 members in California and 2 million nationally. But "the Obama administration is putting enormous pressure on her," she said.

So far, Harris has carved out an independent path, forming a mortgage fraud task force and launching investigations of major lenders and loan servicers. She has also talked about supporting legislation to end "dual tracking" in California, the frustrating process in which banks start foreclosure proceedings even as they're negotiating loan modifications with the same homeowner. She has subpoenaed documents from Fannie Mae and Freddie Mac, the government-backed companies that have acquired about 60 percent of single-family mortgages originated in the past few years.

The nationwide probe began last year after loan servicers were caught using fraudulent documentation for real estate foreclosures that included the use of machines to sign documents. The investigation broadened to include the loan-servicing practices of five banks: Bank of America, JP Morgan Chase, Citigroup, Wells Fargo and Ally Financial.

Now, a $25 billion settlement in which California would get proportionally the biggest share is waiting for approval from the 50 state attorneys general.

According to people familiar with the terms, there would be $5 billion in cash payments to the states and federal government and $20 billion in a national program of mortgage relief, such as lower interest payments and principal reduction for underwater homeowners. That includes $3 billion for refinancing loans of underwater homeowners that the banks kicked in after California withdrew from the negotiations. Some people whose homes were improperly foreclosed would get checks for $1,500 to $2,000.

Iowa Attorney General Miller, who has taken the lead in negotiations, confirmed through his spokesman Geoff Greenwood that most of the other states are considering going ahead with the settlement "if absolutely necessary."

"If a few attorneys general choose not to sign on, we want to ensure that doesn't deny benefits to homeowners in all the other states that do sign on," Greenwood said.

If California stays out, the $25 billion would shrink, but how much California would forgo is unclear, but it could be a lot. "California would lose billions and billions of dollars," said a source familiar with the negotiations.

But another person familiar with the matter said it would be "extraordinary" if California homeowners were to be excluded just because the state decided to go ahead with its own investigation.

Californians for a Fair Settlement, a coalition of several groups, has encouraged Harris to stay out of any settlement that didn't include adequate reform and restitution to homeowners "kicked out of their homes without due process."

"We have to remember, people live in houses, not in ideologies. If the attorney general can come up with a way that this meets our criteria and tens of thousands of people are allowed to stay in their houses and have their principal reduced, that's a good thing," said Rick Jacobs, founder and chairman of the Courage Campaign, which led the formation of Californians for a Fair Settlement.

Contact Pete Carey at 408-920-5419.

  • $17 billion for principal reduction on underwater mortgages, relief on short sales and even anti-blight measures.
  • $3 billion for an underwater refinance program.
  • $5 billion in cash, $4.25 billion to the states and $750 million
    to the federal government. Of that amount, no more than $1.5 billion will be in payments to borrowers.
  • Banks agree to reforms of their loan-servicing processes.

    Sources: State officials involved in the negotiations