In a $26 billion settlement -- the largest of its kind since 1998 -- five major mortgage servicers have agreed to provide relief to homeowners who have endured the mortgage crisis that has had many Maryland residents considering bankruptcy. The deal, which was reached in large part through the work of state and federal officials, has been called historic, though many homeowners will likely say it doesn't do enough.

In any case, the five signed-on mortgage servicers -- JP Morgan Chase, Citigroup, Bank of America, Wells Fargo and Ally Financial -- have agreed to provide $17 billion in mortgage relief to about one million homeowners nationwide. Another $3 billion will go to refinancing borrowers to allow for lower interest rate loans. The federal government will receive $1 billion of the settlement, to be used also for relief for homeowners.

In addition, the settlement may grow to $30 billion if nine other mortgage servicers sign on.

To date, the settlement represents the largest attempt by mortgage servicers to write down the amount owed by homeowners on underwater mortgages that resulted from falling property values.

The deal is expected to affect almost all 50 states, and reductions in loan principal are expected to account for at least 60 percent of the $17 billion mortgage relief. The purpose of writing down principal is to help more people avoid defaulting on their loans.

While write-downs will be much larger in some cases, the average principal write-down could be about $20,000. To be eligible for a principal write-down, a borrower must be delinquent on a mortgage.

Officials say the effects of the principal reduction could go further than the initial dollar amount, since servicers will get credits for writing down underwater loans. It was estimated that the $26 billion settlement could offer up to $40 billion in mortgage relief.

This historic deal is good news for many struggling Maryland homeowners who are on the verge of foreclosure, but the settlement will not provide adequate relief for the great majority of homeowners who have continued to make payments while home values dropped. Annapolis residents who are in need of mortgage debt relief still have the option of considering Chapter 13 bankruptcy, which can allow for the necessary relief to restructure debt with a view toward a healthy financial re-start.

Source: USA Today, "Feds, states, banks agree to $26 billion mortgage settlement," Julie Schmit, Feb. 9, 2012