Frustrated with rising foreclosure rates and convinced that she can do more for Californians who have lost their homes, Kamala Harris, the state's attorney general, walked away from settlement talks with the nation's largest banks on Friday.
Harris is the first state attorney general to pull out of the negotiations.
The talks began in 2010, after the U.S. Department of Justice and the attorneys general of all 50 states sued the nation's five largest mortgage servicers for illegally foreclosing on tens of thousands of borrowers across the country. As part of any settlement, the banks would likely have to pay billions of dollars in compensation, while states would agree to limit future legal actions against them.
"This is not the deal that Californians have been waiting for," Harris said in a letter to Iowa Attorney General Tom Miller and Justice Department attorney Thomas Perrelli, who have been leading the talks.
Harris wrote that 2.2 million Californians are underwater on their mortgages, and she noted that the number of foreclosures in the state has surged while the negotiations have been ongoing.
Harris said she would continue her own investigation into the banks' mortgage practices instead of participating in the talks.
"California is hurting," Harris wrote. "During the period we have been negotiating more than 560,000 additional homes have fallen into the foreclosure process."
Dustin Hobbs, spokesman for the California Mortgage Bankers Association, said the increase in the number of mortgage defaults was simply "a matter of natural course," given the state's high unemployment rate and the large number of borrowers who owe more than their homes are worth.
Hobbs said he found Harris' departure from the national talks "intriguing," adding that by stepping away from the table, she is making the process "more time consuming and expensive for a state that is not flush with money."
Consumer advocates, by contrast, cheered Harris' move, arguing that the talks would not have brought enough benefit to California homeowners.
"It was going to be the worst of all possible worlds, little relief, and handcuffing the state to prevent it from going after further problems," said Kevin Stein, associate director of the California Reinvestment Coalition, a watchdog group.
Orson Aguilar, executive director of the Berkeley-based Greenlining Institute, called Harris' move "a positive step for California."
Aguilar said Harris was looking for a "bailout for homeowners" similar to the one the banks received in 2008 "and she didn't see it coming from these settlement talks."
Last month, New York Attorney General Eric Schneiderman was kicked out of the settlement talks' executive committee after sharply criticizing a proposed deal. But he is still participating in the negotiations.
Schneiderman has launched a separate investigation into Wall Street's role in the mortgage meltdown and has expressed concern that a weak, 50-state settlement would compromise that probe and would not help struggling borrowers to stay in their homes.