Any proposed settlement between mortgage servicers and state regulators shouldn't blanket the industry as a whole, but be restricted to shops that acted maliciously during the robo-signing scandal. If the settlement applies to all firms, the effect on the housing market will be devastating, warned one trade group. The Association of Mortgage Investors met with state attorneys general and the Consumer Financial Protection Bureau this week to discuss a settlement between regulators and servicers. All 50 state AGs are investigating the mortgage servicing practices that led to the robo-signing scandal. An initial proposal was leaked last month, although not all state AGs agree with it. AMI urged the AGs to formulate a settlement that only penalizes the servicers who have acted irresponsibly, acted to the detriment of borrowers and pension funds, and does not result in another government bank bailout. "An incorrectly structured settlement could have devastating effects on the already depressed housing market, America's middle class and the parties invested in the market, such as state pension and retirement systems, unions and university and charitable endowments," said Chris Katopis, executive director at AMI. AMI added that a cohesive settlement will make the protection of investors' assets a top priority. Earlier this year, the firm released a white paper concerning loss mitigation and its proposed remedies in the context of robo-signing. It determined that any settlement that mandates principal reduction of first mortgage loans prior to a reduction of second lien home equity loans is a costly mistake. "It will result in sharp decline in housing prices, market uncertainty and a tidal wave of private litigation," Katopis said. Write to Christine Ricciardi. Follow her on Twitter @HWnewbieCR.