WASHINGTON (MarketWatch) — After more than a year of negotiations, state and federal government officials on Thursday announced a record housing settlement of more than $26 billion with five of the country’s biggest banks over foreclosure abuses, a deal expected to help more than one million U.S. homeowners.

State attorneys-general and federal officials have been in discussions for more than a year with banks over the “robo-signing” crisis - the practice of assigning bank employees to rapidly approve numerous foreclosures with only cursory glances at the glut of paperwork to determine if all the documents are in order. In the end, 49 states participated in the settlement, including California and New York which had previously held out for a better deal.

The settlement is with five big banks: Bank of America Corp. BAC, -1.32% , J.P. Morgan Chase & Co. JPM, -0.84% , Citigroup Inc. C, -2.12% , Wells Fargo & Co. WFC, -2.35% , and Ally Financial Inc., the company formerly known as GMAC.

“These banks will put billions of dollars towards relief for families across this nation,” President Barack Obama said. “It will deliver some measure of justice to families who have already been the victims of abusive practices.”

Nine other financial institutions that have mortgages servicers are in discussions with states and federal regulators, and an agreement that includes them could hike the final settlement amount by billions of dollars. If these other servicers participate, the total settlement could rise to between $30 billion and $45 billion in housing relief.

Of the $26 billion in the deal with the five banks, $17 billion must be spent by the banks to assist struggling homeowners. Of that amount, 60% must be employed to reduce the amount owed by troubled borrowers, known as principal reduction. The amount must be spent within three years, or banks will need to make cash payments to regulators.

A government official said he believes the vast majority of principal write-downs will take place on loans sitting on bank portfolios because they will receive the largest credit against their obligations under the settlement to do so.

The banks would need to meet certain minimum targets, in terms of borrowers assisted, and a bank will receive a much greater credit for reducing principal on a loan on their portfolio, as opposed to a loan serviced for others, according to officials who drafted the deal.

The $17 billion number could grow significantly if banks chose options where they receive a lower credit, such as reducing the principal of loans owned by private mortgage bondholders.

Regulators said that the deal does not resolve all the issues associated with the financial crisis of 2008 and does not relieve banks from Securities and Exchange Commission claims or claims that the new Consumer Financial Protection Bureau might have against the banks. Banks are not released from any criminal liability, in addition, and states can continue to investigate Wall Street in efforts to uncover financial fraud.

CFPB chief Richard Cordray said the bureau will be writing new rules for mortgage servicers and start examining the firms “to ensure they are following the law.”

Regulators said the settlement does not block the states and other regulators from pursuing claims on issues associated with the problems with the securitization or origination of mortgages.

Cash to homeowners, and more

The deal also requires banks to set new servicing standards in the wake of the robo-signing practices.

An additional $5 billion is being allocated in cash to the states and federal government, of which $1.5 billion is being allocated to a fund to be used to provide restitution to homeowners who have lost their home between 2008 to 2011 because they experienced some form of mortgage servicer abuses.

The amounts borrowers will receive will vary, but regulators estimate that roughly 750,000 borrowers could receive between $1500 and $2000 depending on the harm done to them.

Other funds going to the states will be used for their own mortgage assistance programs, including a wide variety of programs, including mediation assistance, housing counseling and mortgage help hot-lines.

Another $3 billion will go to provide refinancing opportunities to borrowers who are current on their mortgages but have no equity in their homes. The program will be similar to an existing Obama administration program that seeks to help these so called underwater homeowners.

Roughly another $1 billion is part of a settlement between the Federal Housing Administration and one financial institution over an origination claim.

As part of the global deal, the Federal Reserve Board on Thursday reached a settlement with the same five big banks for $767 million over foreclosure processing practices.

Also, the Office of the Comptroller of the Currency settled with the five big banks for $394 million over mortgage and servicing practices. California Attorney General Kamala Harris said Thursday that the state’s borrowers will receive up to as much as $18 billion in foreclosure relief.

Also, a Bank of America subsidiary settled with the Federal Trade Commission over charges that it illegally assessed more than $36 million worth of fees against struggling homeowners in violation of an earlier settlement with the agency.

The next step is for the settlement to be filed as a judgement in federal court within a couple weeks. The court will need to approve the judgement. After that, servicers will be obligated to write a check and deposit some funds into an escrow trust that will distribute cash to federal governments and states.

However, analysts at Capital Economics argue that the settlement is not large enough to dramatically alter the outlook for either the housing market or the wider economy.