Feds, states, banks agree to $26 billion mortgage settlement

— -- Five major mortgage servicers agreed to a $26 billion settlement with state and federal officials in a deal that is being called historic, but which critics are likely to say doesn't go far enough.

The deal could grow to $30 billion if nine more servicers sign on, and it's expected to cover almost all 50 states, a White House official said Thursday.

The settlement would be the biggest involving a single industry since a 1998 multistate tobacco deal.

A monitor will be appointed to see that it is carried out.

The five servicers involved so far —Bank of America, JP Morgan Chase, Citigroup, Ally Financial and Wells Fargo— will provide $17 billion in mortgage relief to more than 1 million homeowners. Another $1 billion will go to the federal government; $3 billion will help the servicers refinance borrowers into lower-interest rate loans.

Hundreds of thousands of borrowers are also expected to receive restitution, averaging $1500 to $2000, if they lost homes to foreclosure from 2008 to the end of 2011.

The relief must be extended within three years or servicers would have to pay any remaining part of the settlement in cash. To encourage servicers to do more work sooner rather than later, given the ongoing foreclosure crisis, they'll get more credit for modifying and refinancing loans in the first year of the deal.

The settlement, which has been a year in the making, will create the largest effort by servicers so far to write down the amount homeowners owe on underwater mortgages, where the homeowners owe more than the house is now worth. Falling property values have put many homeowners under water.

The reductions in loan principal are expected to account for at least 60% of the $17 billion pot. By writing down principal, officials hope fewer people will eventually default on their loans.

Most of the writedowns are expected to occur on the 56% of loans that the five servicers own themselves, and will not include any loans owned by mortgage giants Freddie Mac, Fannie Mae or the Federal Housing Administration.

The impact of the principal reduction is expected to go farther than the actual dollars. Servicers will get "credits" for writing down loans at varying stages of being under water. They'll get more credit for some writedowns than for others, officials said.

All told, the $26 billion deal could provide up to $40 billion in mortgage relief, one official estimated.

If so, California officials said in a statement that state would get $18 billion of that, including $12 billion in principal reductions and other relief for an estimated 250,000 homeowners.

"This is an historic amount of relief for California homeowners, but it is one piece of a broader focus. We will continue our crackdown on mortgage fraud and quickly move to pass legislation that will simplify, reform and upgrade our broken mortgage system," California Attorney General Kamala Harris said.

In most cases, to be eligible for principal write downs, borrowers would need to be delinquent on their mortgages. While the principal writedowns, when averaged, might run just $20,000 or so on a national basis, writedowns could be much larger in some cases, officials say.

The servicers will be expected to devise a plan on how to reach out to borrowers to carry out the mortgage relief.

The settlement is expected to include most states; New York and California were prominent last-minute holdouts.