Foreclosure Settlement Will Settle Nothing (Update 1)

Updated with analyst commentary on New York AG's lawsuit, bank stock action.

NEW YORK (TheStreet) -- A foreclosure settlement between the banks and the 50 states Monday, if it does finally happen, will likely not have the positive outcomes that investors have been hoping for.

Details of the deal emerging from recent press reports suggests that the states, while requiring banks to address their foreclosure procedures and reduce principal on mortgages, might not grant them any real immunity from future mortgage litigation.

That offers little comfort to investors who have been hoping that the settlement will provide some much-desired certainty on the scale and scope of the mortgage litigation facing banks.

"I am still concerned that the deal may not be as broad-based, or cover as many issues, as companies would hope for," KBW analyst Fred Cannon said. "A deal without Nevada or California would water down the settlement. And if MERS is up in the air, it is really difficult to have a meaningful settlement."

The New York Attorney General Eric Schneiderman on Friday sued Bank of America(BAC), JPMorgan Chase (JPM) and Wells Fargo(WFC) over their use of Mortgage Electronic Registration System or MERS, an electronic mortgage database, saying it resulted in deceptive and illegal practices, including false documents used in foreclosure proceedings.

The three banks, along with Citigroup(C) and Ally Financial are at the center of the year-long negotiations with the states over their allegedly deceptive foreclosure practices, including robo-signing.

The NY AG's opposition to the deal was well known. "The New York AG's action suggests that New York might not be participating in any servicer settlement. This would not be a surprise since the New York AG had always seemed reluctant to include origination related flaws as part of the settlement. However, even without New York, we believe that a national settlement would still be a meaningful positive for the industry," KBW analysts Bose George, Jade Rahmani and Ryan O' Steen said in a report.

Still, the announcement came days after President Obama named Schneiderman as the lead investigator of a new mortgage fraud unit , which has fueled concerns that the lawsuits against banks will mount.

Massachusetts AG Martha Coakley in December already filed a lawsuit against the big five servicers for unlawful foreclosure practices and said she sought "real accountability' from the banks.

Meanwhile, it remains unclear whether California Attorney General Kamala Harris will sign on to the deal. Harris has said the terms are inadequate and expressed concerns about the settlement interfering with her ability to pursue investigations against banks' mortgage practices independently.

California's participation in the settlement is crucial, however, as absent a deal, banks could see significant litigation from the state that has been severely affected by the housing bust.