Nevada, California Will Pursue Mortgage Fraud Together (BAC, JPM, WFC, C)

The attorneys general of Nevada and California have agreed to co-operate in an investigation of of mortgage fraud and lender misconduct and not to be part of the ongoing settlement talks between lenders and state attorneys general. Last week the state of Massachusetts announced that it had sued Bank of America Corp. (NYSE: BAC), J.P. Morgan Chase & Co. (NYSE: JPM), Wells Fargo & Co. (NYSE: WFC), Citigroup Inc. (NYSE: C), Ally Financial, and Mortgage Electronic Registration System (known as MERS).

The move by the two states, among the hardest hit by the collapse of housing prices, could put an end to the larger settlement talks. Those talks are focused on a $25 billion payment from the banks and a serious overhaul of the banks’ mortgage lending practices.

It may be crude to say so, but $25 billion is peanuts compared with the amount of damage done to house values. One estimate for California alone is that home value losses total more than $600 billion and could reach $1 trillion. Another estimate puts the percentage of Nevada homes that are underwater at 58%. Getting a piece of $25 billion won’t do much to help either state.

The decision by the two states’ attorneys general could jeopardize the entire deal with the banks, but both states could return to the deal provided a more reasonable settlement is reached.