More than a year after several of the nation’s largest mortgage lenders temporarily suspended foreclosures after it was revealed that they had been using untrained, unqualified “robosigners” to process foreclosure documents, the U.S. Justice Dept. and the attorneys general of 49 states have announced a $25 billion settlement that will result in mortgage reductions to some homeowners.

The five lenders involved are Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally.

In addition to the allegations of robosigning, the lenders had been accused of deceptive practices in the offering of loan modifications; failures to offer non-foreclosure alternatives before foreclosing on borrowers with federally insured mortgages; and filing improper documentation in federal bankruptcy court.

“This agreement – the largest joint federal-state settlement ever obtained – is the result of unprecedented coordination among enforcement agencies throughout the government,” said U.S. Attorney General Holder. “It holds mortgage servicers accountable for abusive practices and requires them to commit more than $20 billion towards financial relief for consumers. As a result, struggling homeowners throughout the country will benefit from reduced principals and refinancing of their loans. The agreement also requires substantial changes in how servicers do business, which will help to ensure the abuses of the past are not repeated.”

$20 billion of the settlement is to be put toward financial relief to borrowers. Of that, at least $10 billion will go to reducing the principal on loans for homeowners who are at risk of foreclosure. At least $3 billion will go toward refinancing loans for borrowers who owe more than their mortgages are worth, but who have managed to stay current on their payments. Up to $7 billion will go towards other forms of relief, including forbearance of principal for unemployed borrowers, anti-blight programs, short sales and transitional assistance, benefits for service members who are forced to sell their home at a loss as a result of a Permanent Change in Station order, and other programs.

The five lenders will only receive partial credit for every dollar spent on some of these required relief efforts, so the end result is that the benefit to struggling borrower will actually be larger than $20 billion.

The banks have three years to fulfill all the obligations of the settlement, and 75% of their targets must be reached within 24 months. There are incentives for the lenders if they reach certain goals in the first year, and if they miss their deadlines they will be required to pay substantial additional cash amounts.

Of the remaining $5 billion, $1.5 billion will be used to establish a Borrower Payment Fund to provide cash payments to borrowers whose homes were sold or taken in foreclosure between Jan. 1, 2008 and Dec. 31, 2011, and who meet other criteria. This program is separate from the restitution program currently being administered by federal banking regulators to compensate those who suffered direct financial harm as a result of wrongful servicer conduct. Borrowers will not release any claims in exchange for a payment.

$3.5 billion billion payment will go to state and federal governments to repay public funds lost as a result of servicer misconduct and to fund housing counselors, legal aid and other similar public programs determined by the state attorneys general.

The one remaining holdout in the settlement is the state of Oklahoma.

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