A federal judge granted final approval to a landmark $26 billion settlement over foreclosure processing errors, clearing the way for the nation’s five largest lenders to begin unraveling aid to home owners. The settlement includes guidelines for banks in compensating home owners who may have been wrongfully foreclosed upon as well as mortgage modifications — including principal write-downs — of up to 1 million home owners.

The settlement was first announced more than a month ago but awaited a judge’s final approval. The settlement is between the nation’s five largest mortgage lenders and the attorneys general of 49 states and the District of Columbia. The five lenders part of the settlement are Bank of America, Citibank, JPMorgan Chase, Wells Fargo, and Ally Financial. 

Here's a breakdown of how the settlement money will be allocated: 

• At least $17 billion will go toward modifying mortgages of delinquent borrowers. The modifications may include principal reductions to mortgages of up to $100,000 or more for 1 million home owners who are underwater or delinquent on their loans. 
• About $3.7 billion will go toward refinancing mortgages for home owners who are current on their payments. This aid is estimated to help about 750,000 home owners. 
• $5 billion will go toward banks’ paying fines to the states and federal government for the foreclosure errors. A portion of that will go to funding compensation to home owners who lost their homes to foreclosure due to errors. They stand to receive payments of $1,500 to $2,000. 

The banks have also agreed to adopt stricter standards in processing foreclosures to avoid future errors. 

As long as the banks abide by the terms of the settlement, they will have immunity from future claims by the state governments for wrongdoings in the processing of foreclosures. 

Oklahoma is the only state that did not participate in the settlement agreement. In early February, the state reached a separate agreement with the nation’s five largest lenders for an $18.6 million settlement. 

Watch this video to get more info on the mortgage settlement.

Source: “Court Approves $26 Billion Foreclosure Settlement,” CNNMoney (April 6, 2012)