Banks agree to $26B foreclosure settlement

This post comes from Ronald D. Orol at partner site MarketWatch.

After more than a year of negotiations, the biggest banks, states and federal authorities today announced the largest housing settlement ever -- for more than $26 billion -- over foreclosure practices. It's expected to offer relief to more than 1 million U.S. homeowners.  Post continues below.

State attorneys general and federal officials have been in discussions for more than a year with banks over the "robo-signing" crisis -- the practice of assigning bank employees to rapidly approve numerous foreclosures with only cursory glances at the glut of paperwork to determine if all the documents are in order.

The settlement is with five big banks: Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial, the company formerly known as GMAC.

Nine other financial institutions that have mortgage servicers are in discussions with states and federal regulators, and an agreement that includes them could hike the final settlement amount by billions of dollars. If these other servicers participate, the total settlement could rise to between $30 billion and $45 billion in housing relief.

Of the $26 billion in the deal with the five banks, $17 billion must be spent by the banks to assist struggling homeowners. Of that amount, 60% must be employed to reduce the amount owed by troubled borrowers, known as principal reduction. The amount must be spent within three years, or banks will need to make cash payments to regulators.

A government official said he believes the vast majority of principal write-downs will take place on loans sitting on bank portfolios because they will receive the largest credit against their obligations under the settlement to do so.

The banks would need to meet certain minimum targets, in terms of borrowers assisted, and a bank will receive a much greater credit for reducing principal on a loan on its portfolio, as opposed to a loan serviced for others, according to officials who drafted the deal.

The $17 billion number could grow significantly if banks chose options where they receive a lower credit, such as reducing the principal of loans owned by private mortgage bondholders.

Regulators said the deal does not resolve all the issues associated with the financial crisis of 2008 and does not relieve banks from various Securities and Exchange Commission claims or certain claims that the new Consumer Financial Protection Bureau might have against the banks.

Regulators said the settlement does not block the states and other regulators from pursuing claims on issues associated with problems with the securitization or origination of mortgages.

Cash to homeowners, and more

The deal also requires banks to set new servicing standards in the wake of the robo-signing practices.

An additional $5 billion is being allocated in cash to the states and federal government, of which $1.5 billion will go to a fund to provide restitution to homeowners who lost their home between 2008 and 2011 because they experienced some form of mortgage servicer abuses. The amounts borrowers will receive will vary, but regulators estimate that borrowers could receive between $1,500 and $2,000, depending on the harm done to them.

Other funds going to the states will be used for their own mortgage-assistance programs, which include mediation assistance, housing counseling and mortgage help hot lines.

Another $3 billion will go to provide refinancing opportunities to borrowers who are current on their mortgages but have no equity in their homes. The program will be similar to an existing Obama administration program that seeks to help these so-called underwater homeowners.

Roughly another $1 billion is part of a settlement between the Federal Housing Administration and one financial institution over an origination claim.

Housing regulation officials said they expect close to 50 states to participate. California Attorney General Kamala Harris said today that the state's borrowers will receive as much as $18 billion in foreclosure relief.

The next step is for the settlement to be filed as a judgment in federal court within a couple of weeks. The court will need to approve the judgment. After that, servicers will be obligated to write a check and deposit some funds into an escrow trust that will distribute cash to the federal and state governments. 

More on MarketWatch and MSN Money:

• Boomers turn home equity into 401k funds
• Investing for short-term risk of deflation
• It may be a good time to buy, but not to sell
• Should more homeowners walk away?
• Today's lowest mortgage rates
• More help for jobless homeowners