The five largest U.S. mortgage servicers negotiating with state attorneys general over foreclosure practices would be sued if a settlement isn’t reached, two of the state officials leading the talks said.

Illinois Attorney General Lisa Madigan and North Carolina Attorney General Roy Cooper threatened litigation if settlement talks with the companies, including Bank of America Corp. and JPMorgan Chase & Co., break down.

“If we don’t get an agreement, we’re prepared to go to court,” Cooper told homeowner advocates at a meeting of state attorneys general in Chicago yesterday.

Cooper and Madigan are members of the executive committee of attorneys general which, along with officials from federal agencies, is negotiating with the banks. State and federal officials are seeking to set standards for the way the banks service loans and conduct foreclosures. They also want monetary relief for homeowners.

The attorneys general from all 50 states began investigating banks’ procedures last year.

State and federal officials in March proposed settlement terms that called for “a substantial portion” of monetary relief from the banks to fund loan modifications, including principal reductions.

Making Progress

Iowa Attorney General Tom Miller, who is leading negotiations for the states, told the group of homeowner advocates yesterday that officials are making progress in the talks. He declined to provide any details.

“We don’t want a settlement around the margins, around the edges,” Miller said. “The settlement has to be fundamental, has to make some changes that are worth it, that are constructive.”

The offer from banks to pay $5 billion to reach a settlement isn’t enough, Madigan said yesterday at a press conference.

“We’re going to try to get as much as we can because there are billions and billions of dollars of harm they have done to our entire economy, to our communities and to individual families,” she said.

In an interview afterward, when asked if a deal with the companies is likely to be reached, she said she is “not positive.”

State Resources

“If that’s what we have to do, that’s what we’ll do,” she said of the possibility of suing the banks. “We have the resources to do that.”

Dan Frahm, a spokesman for Charlotte, North Carolina-based Bank of America, and Christine Holevas, a spokeswoman for New York-based JPMorgan, didn’t immediately respond to e-mails seeking comment after regular business hours yesterday.

State and federal officials are also negotiating with Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc.

Georgia Attorney General Sam Olens said June 20 that a settlement may allow states to individually choose how to use any money, including whether apply funds toward principal reductions for borrowers,.

Including those choices may broaden support for any accord among the attorneys general who oppose requiring banks to fund principal writedowns, Olens said in an interview. He estimated that as many as 20 of his colleagues oppose writedowns.

At least eight attorneys general, including Olens, Texas Attorney General Greg Abbott and Florida’s Pam Bondi, have publicly opposed principal writedowns as part of any deal. Olens, Abbott and Bondi are Republicans.

Geoff Greenwood, a spokesman for Miller, a Democrat, declined to comment on whether officials had discussed a structure that would give states the option of using money to fund principal writedowns.