The talks aim to settle allegations that banks such as Bank of America, JPMorgan Chase, Wells Fargo, and Citigroup seized the homes of delinquent borrowers and broke state laws by employing so-called "robosigners", workers who signed off on foreclosure documents without reviewing the paperwork.
State prosecutors proposed effectively releasing the companies from legal liability for allegedly wrongful securitization practices, the FT said, citing five people with direct knowledge of the discussions.
The banks, however, are pressing for immunity from a raft of alleged civil violations and have called the latest proposal a "non-starter," the newspaper said.
The two sides are expected to meet again this week to work on agreement, the FT said.