A $26 billion settlement that would fund loan modifications and mortgage refinancing for at-risk homeowners was announced today by state and federal officials.

The agreement settles certain claims against the nation's five largest mortgage lenders for improper foreclosure practices. The Justice Department and attorneys general for nearly all 50 states have signed off on the agreement, with Oklahoma the loan remaining standout as of this morning.

$17 billion for principal reduction, loan modifications

According to the Justice Department, the agreement will provide $17 billion in mortgage relief for at-risk mortgage borrowers in the form of principal reductions and other types of assistance provided through loan modifications. Because of the way the agreement is structured, total principal reductions could actually reach $35 billion.

Another $3 billion will go toward enabling underwater homeowners to refinance their mortgages at lower interest rates, despite owing more on their home loans than their properties are worth. It's not clear if the funds would be used for principal reductions or some other means of facilitating refinancing.

Another $1.5 billion would be in the form of direct payments to homeowners who lost their homes to foreclosure since 2008. Some 750,000 former homeowners would receive payments of $2,000 apiece. Accepting the payments would not compromise their right to seek other damages in court for foreclosure-related abuses.

Approximately $5 billion would also be paid out to the states to fund anti-foreclosure programs and other forms of homeowner relief.

Fannie, Freddie borrowers left out

In one major exclusion, mortgages backed by Fannie Mae and Freddie Mac, which represent the majority of middle-class mortgages in the United States, are not covered by the agreement. The federal government has implemented a number of measures primarily aimed at providing relief for Fannie Mae and Freddie Mac borrowers, including loan modification and mortgage refinancing through the Home Affordable Modification Program (HAMP) and Home Affordable Refinance Program (HARP), respectively, but those programs have fallen considerably short of their original objectives.

The five lenders will receive credit for principal reductions and other mortgage relief measures they perform over the next three years, with enhanced credit for any performed in the first 12 months. The size of the agreement could reach as high as $40 billion if another 9 smaller lenders agree to the settlement as well.

Eligible borrowers will be contacted

It's expected to be at least six months before homeowners begin to obtain relief under the settlement, however. It's expected to take one to two months to choose an administrator to oversee the settlement, after which the parties to the agreement will spend the next six to nine months identifying and contacting eligible homeowners.

The five mortgage lenders participating in the agreement are Ally Financial (formerly GMAC), Bank of American, Citi, JP Morgan Chase and Wells Fargo.

Published on February 9, 2012