The agreement aims to prevent foreclosures, partially compensate those who have lost their homes and help stabilize the housing market, as well as hold banks accountable for practices that fueled the foreclosure crisis and financial meltdown. Worth at least $25 billion, the pact was hammered out by state attorneys general and federal authorities over 14 months of intense negotiations with the banks.

California Attorney General Kamala Harris, who withdrew from settlement talks for several months, won key concessions, including the right for states and homeowners to pursue additional actions against the banks, and a big pot of money for reducing mortgage balances.

The settlement with 49 states (Oklahoma was the holdout) provides “meaningful relief but not at the expense of meaningful investigation,” Harris said. “It was imperative that we not give a blank check of immunity to the banks for their wrongdoing.”

Slipshod foreclosure paperwork, which became known as robo-signing, triggered the action by the attorneys general. Ally Financial, Bank of America, Citigroup, JPMorgan Chase and Wells Fargo, the five banks in the pact, service more than half the nation’s mortgages.

”Today’s agreement represents a very important step toward restoring confidence in mortgage servicing and stability in the housing market,” said Mike Heid, president of Wells Fargo Home Mortgage, in a statement. “(It) builds on the significant refinance and customer relief efforts we already have undertaken.”

California, with the most foreclosures of any state, stands to get the lion’s share of the settlement, as much as $18 billion if the total amount climbs to $40 billion under a complex formula. If nine other servicers take part, the total value could reach $45 billion.

Most significantly, the pact earmarks $12 billion for the state to reduce loan balances or offer short sales to about 250,000 Californians who are underwater on their homes and behind on their mortgages. With 2.2 million underwater homeowners in the state, resetting loan balances was a goal for many consumer advocates, but to date banks have fiercely resisted principal reductions.

”We believe principal reduction will essentially allow borrowers to see daylight, start to gain equity sooner (and lose) the sense of hopelessness from being under water,” said Paul Leonard, director of the California office of the Center for Responsible Lending. “This creates a model we hope will lead to more servicers doing principal reductions more routinely.”

Another $849 million will refinance about 28,000 underwater California homes whose owners are still current on payments. The state will get $1.1 billion to help about 16,000 unemployed homeowners as well as communities afflicted by foreclosure blight. Another $3.5 billion will go toward wiping out unpaid balances for 32,000 people in future foreclosures.

Finally, $279 million will go to offering $1,500 to $2,000 each to 140,000 Californians who lost their homes from 2008 through late 2011.

”For folks who were wrongfully foreclosed on, that is a paltry sum,” Leonard said. Homeowners who believe their foreclosures involved fraud can still pursue action against the banks. Harris’ office is expanding its Mortgage Fraud Strike Force and federal regulators, led by the Comptroller of the Currency, are investigating foreclosure irregularities.

Nationwide, the pact calls for a million homeowners to receive principal reductions, refinances, forebearance or short sale assistance, and 750,000 foreclosed-upon people to receive up to $2,000 each in restitution.

Big though the numbers sound, many struggling homeowners will not get help. Only customers of the five banks are eligible. People whose loans are held by Fannie Mae or Freddie Mac — which back 62 percent of California mortgages and half of those nationwide — are not included.

”Relative to the housing crisis, it’s small,” said Jed Kolko, chief economist at real estate site Trulia.com. “The loan modifications could yield tens of billions in principal reductions for 1 million homeowners–but that’s a sliver compared with the 11 million homeowners today who are over $700 billion underwater.”

Bruce Mirken, a spokesman for Berkeley’s Greenlining Institute advocacy group, said he wants to see continued investigations and prosecutions over mortgage misdeeds. “We know that a lot of dodgy lending happened and that a lot of it was centered on communities of color and limited English speakers,” he said.

The deal includes supervision of the banks’ implementation, by both a federal authority and a California monitor to be appointed by Harris. Banks will face penalties for failing to meet various benchmarks.

”External oversight is critical to make sure these entities cannot squirm out of their commitment,” said Maeve Elise Brown, executive director of Housing & Economic Rights Advocates, an Oakland nonprofit that assists struggling homeowners. “This is a remarkable-looking settlement but if it doesn’t actually get enforced, it will be meaningless.”

Brown is concerned that the big-bucks pact could spawn the same kind of scam artists who prey on homeowners by offering to help them get loan modifications for a fee.

”As soon as any new programs are released, some new creep comes out from under a rock to try to steal your money,” she said. “Verify any offer of assistance to make sure it is legitimate.”

Some observers said that the settlement could help lenders and boost the housing market.

”This will burn off the fog of uncertainty that banks have faced,” said Jim Wilcox, a business professor at UC Berkeley. “Presumably it will start to unclog some of the backed-up foreclosures that got stalled (during the robo-signing investigation). Buyers may be a little more confident that there won’t be a torrent of supply coming into the market.”

Sylvia Kahn and her husband, Daniel Salsbury, are among homeowners who might be helped. They have been fruitlessly asking Bank of America for a loan modification or refinance on their Alameda house for more than three years. Both schoolteachers, they saw their incomes dwindle from furloughs and increased health care costs, at the same time that Kahn’s elderly mother moved in with them and their two children, ages 7 and 12.

Kahn left her teaching job for a better-paying position as an office manager. Despite improving their financial situation, they still were rejected for solutions that would reduce their monthly payments, she said. “It feels to me like we don’t make enough to help ourselves but don’t make little enough to get help,” she said. “We are so stuck in the middle.”

She wasn’t optimistic about the potential new assistance.

”I’m really distrustful of what the homeowners will actually see,” she said. “Any time a new opportunity comes out, I’ve spent hours on the phone. I feel the bulk of the money goes into the bureaucracies of running the programs, not helping the homeowners. It just depends on what this help looks like and who will qualify.”

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By Carolyn Said