WASHINGTON (Legal Newsline) - Federal officials and a group of state attorneys general have reached a $25 billion agreement with the nation's five largest mortgage servicers, making it the second largest settlement obtained by a group of attorneys general.

The U.S. Department of Justice made the announcement Thursday morning.

Of the $25 billion, California claimed the largest portion of the pot -- $18 billion.

California Attorney General Kamala Harris called the deal a "historic commitment" for the state, which was the hardest hit by the mortgage crisis.

"California families will finally see substantial relief after experiencing so much pain from the mortgage crisis," she said in a statement Thursday morning. "Hundreds of thousands of homeowners will directly benefit from this California commitment."

Talks between the attorneys general, federal officials and the five banks -- Wells Fargo & Co., JPMorgan Chase & Co., Citigroup Inc., Ally Financial Inc. and Bank of America Corp. -- dragged on for months.

The probe, which began in October 2010 with inquiries into so-called "robosigning" practices, broadened into identifying and addressing additional alleged improper foreclosure practices.

The multistate settlement, which would cover only those mortgages held by the five banks, is said to lower nearly 1 million homeowners' mortgages by about $20,000 and provide for payments of $1,800 to those harmed by the banks' lending practices.

California had departed from the negotiations in September, when the estimated relief for the state was estimated at $4 billion.

Harris, at the time, called the proposed deal "inadequate," and insisted on more relief for distressed homeowners, meaningful enforcement and the ability of state attorneys general to pursue investigations into misconduct.

"This outcome is the result of an insistence that California receive a fair deal commensurate with the harm done here," the attorney general said Thursday.

"We insisted on homeowner relief for Californians and demanded enforceability so homeowners actually see a benefit that will allow them to stay in their homes, and preserved our ability to investigate banker crime and predatory lending."

According to the Attorney General's Office, the multistate deal does not grant any immunity from criminal offenses nor does it prevent homeowners or investors from pursuing individual, institutional or class action civil cases against the five banks.

In addition, Harris said she has obtained "separate, enforceable guarantees" to make sure the banks will be accountable for their commitments to California.

As part of the separate guarantee, banks must enact a minimum of $12 billion in principal reductions for California homeowners. Failure to achieve this minimum level of reductions will result in substantial cash payments of up to $800 million that the banks will have to pay to the State.

Unlike the larger multistate agreement, which is enforceable in a federal court in Washington, this payment provision empowers Harris to summon the banks to California state court.

Harris said she will continue to fight for principal reductions for those California homeowners whose loans are owned by Fannie Mae and Freddie Mac -- which are not included in the multistate deal.

The state's participation in the settlement also increased the amount of relief other states will receive by about $6 billion.

As of Wednesday, more than 40 state attorneys general had signed on to the agreement -- Rhode Island's Peter Kilmartin, Missouri's Chris Koster and Oregon's John Kroger included.

Also joining the group was Illinois Attorney General Lisa Madigan.

Madigan said the deal will provide $1 billion in relief to Illinois homeowners.

"After many months of investigation and negotiation, I've concluded that this settlement accomplishes two major goals: it provides timely help for struggling homeowners, and it establishes new rules for mortgage servicing that will protect homeowners in the future," she said in a statement Thursday morning.

"Critical" to the settlement are reforms to the national mortgage servicing standards, Madigan said.

"In the past, regardless of how well borrowers complied with bank requirements to try to obtain a loan modification or other assistance, borrowers ended up facing foreclosure. These tough, new standards will ensure borrowers are now given a fair chance to save their homes," she said.

They include:

- Distressed home borrowers will be considered for a loan modification rather than being automatically referred to foreclosure;

- No loan will be referred to foreclosure while a loan modification is being considered;

- Borrowers will be allowed to appeal a denial of a loan modification;

- Mortgage servicers must provide a single point of contact for borrowers as well as easier methods for checking on the progress of their loan modification applications; and

- Loan servicers will be held to strict timelines in dealing with distressed borrowers.

Banks that violate the settlement's terms will be assessed "significant" monetary penalties, Madigan said.

The multistate agreement also provides special relief for members of the military, the attorney general said.

Servicers will be required to set up a specially trained single-point-of-contact to address military members' mortgage issues.

Military members also may be eligible for a waiver of a mortgage deficiency when they need to sell their home in a short sale when ordered to move, under the multistate deal's terms.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.