State and federal officials have reached a landmark, $25 billion settlementwith five of the nation’s biggest banks over flawed and fraudulent foreclosure practices.

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The deal would settle any potential state charges over allegations of improper foreclosures based on “robo-signing”–  seizures made without proper paperwork — for Bank of America (NYSE:BAC), JPMorgan (NYSE:JPM), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), and Ally Financial. The banks would get immunity from future state servicing and originating claims, but homeowners would still be allowed to pursue claims against banks and states could pursue criminal investigations.

Most of the settlement will go toward helping underwater homeowners — those who owe more on their mortgages than their homes are worth — by lowering their loan balances. The relief will be doled out over the course of the next three years, though banks have been given incentives to provide most of the relief within the next 12 months.Federal officials say about $17 billion of the settlement will go toward reducing the principal owed by underwater homeowners and those who are behind on their mortgages, providing relief for up to 1 million homeowners. Up to 750,000 other homeowners who are underwater but are current on their mortgage payments will be able to refinance their current loans at lower rates, but will not receive a reduction in principal.The settlement sets aside $3 billion to account for the reduced interest payments banks will receive after the refinancing, which is expected to substantially reduce the size of homeowners’ monthly mortgage payments. Another $1.5 billion of the settlement will go to homeowners who had their homes foreclosed upon.

The settlement will also bar lenders from trying to foreclose on borrowers while simultaneously negotiating mortgage modifications. Additionally, lenders will have to make sure borrowers have a single point of contact within their firms, rather than being shuttled from employee to employee with each interaction.

Officials said the agreement, the largest government-industry settlement in over a decade, would probably be filed in a federal court within a matter of weeks, and would require the consent of a judge. Once it is approved, banks will have to begin depositing money into a trust account, and those funds will be distributed to qualified homeowners by the government.However, the $25 billion settlement figure is not set in stone. If fewer states sign on, that number goes down. That also means that, should Oklahoma, the loan remaining holdout, decide to sign on to the agreement, that number could climb to $26 billion.

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Whether New York would participate in the settlement remained a question mark until this week, as some of the banks involved in the deal are currently being sued by New York Attorney General Eric Schneiderman. Those banks — Bank of America, Wells Fargo, and JPMorgan — have asked for a legal pass from Schneiderman’s suit, which accuses them of deceptive foreclosure practices for relying on the Mortgage Electronic Registration System.Schneiderman objected to banks being granted too broad of an immunity for their misdeeds, and called for more investigations before any settlement was agreed. Negotiators tried to narrowly tailor the legal releases in a way that would allow Schneiderman and others to pursue their own investigations of other mortgage abuses.

California had also been on the fence, but ultimately agreed to sign on to the deal, as did New York, helping to ensure a much larger settlement than banks would otherwise have been willing to sign.

The settlement could still grow in size and scope if officials are able to sign on an additional nine mortgage servicing companies with which they have been negotiating in recent weeks. Their participation could raise the face value of the settlement to about $30 billion.

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To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com

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