(Reuters) - State attorneys general are negotiating to give major banks wide immunity over irregularities in handling foreclosures, even as evidence has emerged that banks are continuing to file questionable documents. A coalition of all 50 states' attorneys general has been negotiating settlements with five of the biggest U.S. banks that would include payment of up to $25 billion in penalties and commitments to follow new rules. In exchange, the banks would get immunity from civil lawsuits by the states, as well as similar guarantees by the Justice Department and Department of Housing and Urban Development, which have participated in the talks. State and federal officials declined to say if any form of immunity from criminal prosecution also is under discussion. The banks involved in the talks are Bank of America, Wells Fargo, CitiGroup, JPMorgan Chase and Ally Financial.

(Dow Jones)- U.S home prices increased in May for the second- straight month, a government agency said Thursday, a modest improvement for the struggling housing market. Home prices rose 0.4% on a seasonally adjusted basis from April, according to the Federal Housing Finance Agency's monthly home-price index. The results were better than expected. Economists surveyed by Dow Jones Newswires had expected a 0.1% monthly increase. April's results were revised downward to a 0.2% increase from an initial estimate of a 0.8% increase. Compared with a year earlier, prices were still down 6.3%. May's index value was 181.8. A reading of 100 is equal to the price of homes in January 1991. The FHFA's index is calculated by using the prices of houses purchased with mortgages backed by government-controlled mortgage companies Fannie Mae (FNMA) and Freddie Mac (FMCC). Despite the monthly increase, the ailing U.S. housing market remains one of the major weak spots for the economy. The index remains 19.6% below its peak in April 2007 and roughly equal to the level of January 2004. Sales of previously occupied homes in the U.S. fell 0.8% in June to a seven- month low, the National Association of Realtors said Wednesday. The median sales price, however, was $184,300, up 0.8% from a year earlier.

MBS just made their most abrupt move down this morning, following the 10am economic data, which included Philly Fed and Leading Indicators. However, this data plays more of a supporting role to the star of today's show: the EU summit, which largely set bond-market weakness in motion. Domestic econ data and news was given an opportunity to "argue" against that weakness, but none of the arguments have been convincing. And so the steamroller continues to pave the path of least resistance to higher rates for now. MBS are at their lows of the day at 100-15, and 10yr notes fine themselves dancing around 3.0. Lenders who already released rate sheets won't want to look at MBS at these levels much longer before considering repricing for the worse, though it's probably too soon for most lenders. That means that unless the lender you're considering a lock with is one that characteristically reprices early and often, we'd probably wait this out a bit longer.

(Reuters) - A key gauge of future U.S. economic activity rose less than expected in June as headwinds from the debt ceiling debate and recent floods and tornado damage in some regions of the country kept growth moderate, the independent Conference Board said on Thursday. The board said its Leading Economic Index increased 0.3 percent to 115.3 after a 0.8 percent increase in May to a record 114.7, which was revised upward to 114.9. Economists polled by Reuters had expected the index to rise 0.2 percent. "The economy faced some recent unexpected headwinds," said Ken Goldstein, a Conference Board economist. "If these headwinds subside, the underlying trend of slow growth, as suggested by LEI, should be more apparent over the next few months." (Reporting by Margaret Chadbourn; Editing by James Dalgleish)

(Reuters) - Factory activity in the U.S. Mid-Atlantic region bounced back in July after unexpectedly shrinking the month before, but still remained at a weak level, a survey showed on Thursday. The Philadelphia Federal Reserve Bank said its business activity index rose to positive 3.2 from minus 7.7 the month before. That topped economists' expectations for 2.0, according to a Reuters poll. Any reading above zero indicates expansion in the region's manufacturing. The survey covers factories in eastern Pennsylvania, southern New Jersey and Delaware. It is seen as one of the first monthly indicators of the health of U.S. manufacturing leading up to the national report by the Institute for Supply Management. (Reporting by Leah Schnurr, Editing by Chizu Nomiyama)

Fed Chairman Ben Bernanke spoke today on the Dodd-Frank Act. He made no mention of mortgage-related reforms in his prepared remarks. (Reuters) - Regulators will soon lay out rules governing financial firms so large their collapse could rattle global markets, Federal Reserve Chairman Ben Bernanke said. Bernanke, in testimony prepared for a Thursday Senate Banking Committee hearing, also said regulators are looking into potential gaps in last year's Dodd-Frank financial oversight law, including the oversight of money market mutual funds and the tri-party repo system. "The U.S. agencies are also working together to address structural weaknesses in areas not specifically addressed by the Dodd-Frank Act," Bernanke said. Efforts among the Fed and other agencies to align domestic and international regulations are going well, Bernanke said. The Fed is on track to put international bank safety standards known as Basel III into effect on schedule, he said.

(Reuters) - Ingersoll Rand Plc (IR.N) reported a lower-than-expected quarterly profit on Thursday amid weakness in its residential unit that makes home air conditioners and locks, sending its shares down 6 percent in premarket trading. Ingersoll, which also makes industrial air compressors and security technology including Schlage locks, said remodeling and home building markets remained "stagnant." Earlier this week, United Tech, parent of Carrier, the world's No. 1 maker of heating and cooling (HVAC) equipment, also noted weakness in residential demand for air conditioners. "We're still only about 60 percent of peak demand and we're probably not going to get back to peak until we see housing pick back up," Greg Hayes, United Tech's finance chief, said. He joked, "If it touches the consumer, unless you put an Apple on it ... it's not moving."

(Reuters) - The euro zone bailout fund, the EFSF, will provide loans to Greece, Ireland and Portugal at a lower interest rate and for longer maturities, according to draft summit conclusions seen by Reuters on Thursday. Loans from the European Financial Stability Facility will be extended from 7.5 years to at least 15 years and the interest rate will be lowered from around 4.5 percent currently, in the case of Greece and Portugal, to around 3.5 percent, the draft document said. "We will provide EFSF loans at lending rates equivalent to those of the balance of payments facility (currently approx 3.5 percent) without going below the EFSF funding cost. "This will be accompanied by a mechanism which ensures appropriate incentives to implement the programme, including through collateral arrangements where appropriate," it said, a nod to Finland's demand for collateral against new loans. The EFSF will also be allowed to provide precautionary credit lines to countries in the euro area, including those that are not under EU/IMF bailout programmes, the draft said. It added that talks with the private sector on shouldering some of the burden of a second bailout package for Greece continue, with all options still on the table. "The financial sector has indicated its willingness to support Greece on a voluntary basis through a menu of options (bond exchange, rollover, and buyback) at lending conditions comparable to public support with credit enhancement," it said.

There may be a "gang of six" in Washington, but an almost equally large and perhaps more disturbing gang is jumping in new members one by one this morning. The kingpin? Most likely the EU Summit. Although we're not experts on the subtleties and intricacies of the the periphery debt crisis across the pond, it seems like the EFSF agreeing to intervene/inject/loan is the central component of the summit damaging domestic bond markets this morning. Why is that? Keep in mind how much of the current strength in US Treasuries (which have brought MBS along for the ride) has come as a result of FLIGHT-TO-SAFETY buying stimulated by concerns that a collapse of EU Periphery would have serious systemic consequences. So naturally, anything that soothes those concerns will likely be unfriendly to bond markets. Risk on, risk off Daniel-San! Maybe the easiest way to think of it is that this morning's news about the EFSF intervention capabilities is, in some ways, similar to the Fed announcing various stages of bond buying and MBS purchasing. Remember that? Even before the first dollars were spent, markets moved fairly rapidly. Without being too dismissive about domestic econ data, you might almost say the other members of this morning's gang of bond-market enemies--like Jobless Claims--don't matter too much. Claims could have mattered more if they were farther from consensus, but the fact that they were close simply allows the focus to remain on Europe. MBS are down 6 ticks (6/32nds) on the day to 100-19, not too shabby considering the 10yr is spiking to the extreme weak side of it's 2 week range at 2.973. We saw 2.98's on the 15th. Even so, lower MBS and volatility in bond markets won't help rate sheets this morning. The next round of Econ data hits at 10am, as well as Senate testimony from Bernanke.

Jobless claims rose to 418k this week, slightly higher than the 410k expectation. The report's internals largely counteract what might seem like a bond-market-friendly headline though. Continued claims fell to 3.698 mln from 3.748 mln in the previous week, and the insured unemployment rate fell from 3.0 to 2.9. Rounding out the positive internals (economically positive, which tends to be bond market negative, in general), the 4 week moving average of the claims headline fell slightly, from 424k to 421,250.