Banks to pay $25B for mortgage abuses

The deal also ends a separate investigation into Bank of America and Countrywide for inflating appraisals of loans from 2003 through most of 2009. Bank of America will pay $1 billion to settle that federal probe.

Oklahoma is the lone holdout and will receive no money. 

Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial will pay to reimburse American homeowners and overhaul their industry.

North Carolina Commissioner of Banks Joe Smith has been appointed as the independent monitor to ensure that banks uphold the agreement nationwide.

North Carolina homeowners will received $338 million in the settlement, Attorney General Roy Cooper said. About one-tenth of that total will be paid to foreclosure victims, while $179.5 million will help reduce the principal on loans and provide other assistance to homeowners at risk of default.

Another $61.5 million of North Carolina's settlement will help homeowners who are "underwater" – they owe more on their mortgages than their homes are worth – refinance their loans at lower interest rates. The state will use the remaining $63.7 million to provide housing counselors, legal help and financial fraud detection.

“This agreement is about helping homeowners who tried to make good but were wronged,” Cooper said in a statement. “Just as important, it looks forward by establishing a clear set of rules to make sure foreclosures are done correctly and fairly.”

The nationwide settlement stems from abuses that occurred after the housing bubble burst. Many companies that process foreclosures failed to verify documents. Some employees signed papers they hadn't read or used fake signatures to speed foreclosures — an action known as robo-signing.

The deal would be the biggest involving a single industry since a 1998 multistate tobacco deal. It would force the five largest mortgage lenders to reduce loans for about 1 million households. The reduced loans would benefit homeowners who are behind on their payments and owe more than their homes are worth.

In addition, another 750,000 Americans – about half of the households who might be eligible for assistance under the deal – would likely receive checks for about $1,800 each.

The banks and U.S. state attorneys general agreed to the deal late Wednesday after 16 months of contentious negotiations.

New York and California came on board late Wednesday, according to a person close to the negotiations. The source was not authorized to disclose the agreement before Thursday's announcement.

California has more than 2 million underwater borrowers. New York has some 118,000 homeowners who are underwater.

The settlement ends a painful chapter that emerged from the financial crisis, when home values sank and millions edged toward foreclosure. In addition to the payments and mortgage write-downs, the deal promises to reshape long-standing mortgage lending guidelines. It will make it easier for those at risk of foreclosure to make their payments and keep their homes.

“Some foreclosures have to happen, but they must be done correctly and fairly,” Cooper said. “While this should have been the standard all along, our investigation has shown that it wasn’t, and it might never have been without this settlement.”

Those who lost their homes to foreclosure are unlikely to get their homes back or benefit much financially from the settlement.

The settlement would apply only to privately held mortgages issued from 2008 through 2011. Banks own about half of all U.S. mortgages — roughly 30 million loans.

Some critics say the proposed deal doesn't go far enough. They have argued for a thorough investigation of potentially illegal foreclosure practices before a settlement is hammered out.

Under the deal:

. $17 billion will go toward reducing the principal that struggling homeowners owe on their mortgages.

. $5 billion will be placed in a reserve account for various state and federal programs; a portion of that money will cover the $1,800 checks sent to those homeowners affected by the deceptive practices.

. About $3 billion will help homeowners refinance at 5.25 percent.

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Associated Press Writer Michael Virtanen contributed from Albany, NY to this report.