The proposal being sought by the big banks “is not the deal California homeowners have been waiting for,” wrote Kamala D. Harris, the state attorney general, in a letter to those leading the talks. It is “inadequate,” she wrote.

California is among the states whose homeowners have suffered the most in the housing market collapse, and because of its size, officials involved in the negotiations said banks, including Bank of America, Wells Fargo and JPMorgan Chase, would want its participation before agreeing to settle and to pay substantial sums.

The talks have been led by the attorney general of Iowa as well as an associate general counsel at the Justice Department’s headquarters. The negotiations have evolved from disputes over so-called robo-signing and other improper foreclosure practices into a battle over nearly every aspect of the banks’ roles in the housing bubble and subsequent collapse.

If a deal were reached, it could provide billions of dollars for the Obama administration and states to distribute in assistance to homeowners, free banks from some of the mortgage claims that have caused their stocks to sputter, and score a victory for the Justice Department, which has been criticized for pursuing very few cases related to the financial crisis. A spokeswoman for the department said Friday evening that the negotiations would continue.

“We continue to work with the state attorneys general, including California, to ensure that the banks are held fully accountable for their actions,” said Tracy Schmaler, the spokeswoman.

The main sticking point has been the banks’ desire for a broad legal waiver covering future claims over their mortgage practices.

They would like the waiver to cover not only robo-signing and other foreclosure practices but also potential claims related to their creation of mortgage securities before the financial crisis.

A broad deal might help banks reassure investors that they have a good handle on their potential payouts.

But Ms. Harris said in her letter that she was running a full investigation into the creation and sale of mortgage securities. She said she did not want to participate in the deal partly because it would limit her investigation. Though she is the first state official to back out of the negotiations entirely, attorneys general from several states have expressed reservations about a broad waiver, including New York, Delaware, Massachusetts and Nevada.

New York has been among the most vocal in its critiques of such a deal, and New York’s attorney general, Eric T. Schneiderman, was kicked off the lead committee of officials negotiating the deal.

He has not, however, pulled out of the talks completely.

Bank analysts said that hopes for a deal had been fading for some time and that banks had little reason to participate without California.

“The banks aren’t going to be interested in settling unless it removes future liabilities,” said Jeffrey Harte, a bank analyst with Sandler O’Neill, “and here you have population-wise a very big state — one of the states with a larger portion of mortgage issues — not going along with it.”

Mr. Harte said an agreement that covered only foreclosure missteps, like robo-signing, would be unlikely to generate the amount of money that federal and state officials had been seeking for homeowner aid. The banks may want to hold onto some of those funds to settle claims about their mortgage securities as well as future losses on mortgages they own.

It remains possible, of course, that California could rejoin the settlement talks, but Ms. Harris said in her letter Friday that the effort was not worth their continued resources.

One tricky issue has been how much aid would be awarded to homeowners in California. Any money collected under a national deal would be distributed among the 50 states, and officials in California and other states that have been hit hardest are under political pressure to obtain significant sums.

Opposition to a deal has grown as well.

A coalition called Californians for a Fair Settlement has been working to block a deal. Among other things, it wants the banks to pay a far higher penalty than the $20 billion that has been floated.

They also want the deal to include widespread principal reduction for the state’s homeowners who owe more than their houses are now worth.

Complicating the situation, the housing market in many parts of the country has deteriorated further as the states have been discussing a settlement.

Ms. Harris pointed to the housing weakness in California in her letter. She said that in the 11 months of talks, more than a half-million homes had entered foreclosure in the state. While California used to have five cities ranked on the list of the 10 highest in foreclosures, it now has eight such cities.

Article source: http://feeds.nytimes.com/click.phdo?i=b4d33adb44587cab5b6a60e7b4f4afc6