NEW YORK (CNNMoney) -- A federal judge approved the $26 billion settlement deal reached between the nation's five largest mortgage lenders and the attorneys general of 49 states and the District of Columbia over foreclosure processing abuses.
Judge Rosemary Collyer in the U.S. District Court for the District of Columbia approved consent judgments with Bank of America (BAC, Fortune 500), Citibank (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Wells Fargo (WFC, Fortune 500), and Ally Financial (the former GMAC) late Thursday.
The approval clears the way for the banks to compensate homeowners who may have been impacted by the so-called robo-signing scandal, in which bank employees signed hundreds of documents a day attesting to facts that they had little or no knowledge of.
Under the settlement, the banks committed at least $17 billion toward modifying mortgages for delinquent borrowers. The modifications will include large principal reductions of as much as $100,000 or more for roughly one million homeowners who are underwater on their mortgages and behind on payments.
Another $3 billion or more will go toward refinancing mortgages for borrowers who are current on their payments. This is supposed to help some 750,000 borrowers take advantage of historic low interest rates.
The banks will also pay $5 billion in fines to the states and the federal government, the only hard money involved in the deal. Out of that fund will come payments of $1,500 to $2,000 to homeowners who lost their homes to foreclosure. Those payments will total $1.5 billion, according to the consent agreement. Other funds will be paid to legal aid and homeowner advocacy organizations to help individuals facing foreclosure or experiencing servicer abuses.
The judge's approval capped more than a year of hard negotiations between the banks and the states attorneys general as well as the U.S. Department of Housing and Urban Development, said Amy Bonitatibus, a spokeswoman for Chase.
"The settlement includes far-reaching relief that will help many of our customers and complement our already extensive efforts to improve our borrower assistance efforts and servicing processes," she said.
As a result of the settlement, banks will get immunity from future claims by the state governments as long as they abide by the terms of the settlement, although homeowners may still pursue individual claims. The states can also press criminal charges, if they're merited.
Only one state attorney general, Oklahoma's E. Scott Pruitt, declined to participate in the agreement. The state reached a separate $18.6 million settlement with the five lenders in early February.
The banks have also agreed to adhere to a strict standard of foreclosure processing, one that does not allow for robo-signing and other abusive practices.
Now that the settlement has been approved, the banks are now free to identify and reach out to delinquent borrowers to offer them more affordable mortgage terms. Bank of America has already compiled a list of 200,000 potential beneficiaries of its principal reduction modifications.
Chase said it is currently reviewing anyone who applied for a mortgage modification to see if the borrower qualifies under the settlement.
"We have been taking calls from customers since March 1 for this program," said Mark Rodgers, a Citibank spokesman. "We have already moved a few hundred cases into the pipeline."
Wells Fargo began accepting applications on March 1, and will start to reach out to customers by mail in a matter of days, according to spokeswoman Vickee Adams.
Ally Financial didn't immediately return calls seeking comment.
When the settlement was first announced, it triggered a flow of both optimism and outrage among mortgage borrowers.
The terms of the settlement will only apply to certain borrowers who have mortgages held by the five major lenders. Borrowers who have a mortgage held by Fannie Mae (FNMA, Fortune 500) or Freddie Mac (FRE) -- roughly half the market -- are out of luck, however. Loans insured by the Federal Housing Administration are also ineligible.
For Hector Ibarra, who lives in the ground zero for foreclosures, Las Vegas, the news is a devastating. Ibarra owes $137,000 on his townhouse, which is now worth less than $40,000 in today's market, but because his mortgage is owned by Freddie Mac he doesn't qualify for a principal reduction or modification under the settlement deal.
"I can afford my mortgage but it is pretty depressing seeing so many people getting out of deals they made just a few years back and living much better than I am," he said.
The fact that the principal-reduction provisions apply only to delinquent borrowers is also a sore point for many borrowers.
"We are current and always have been," said Chad Ghorley, of North Carolina. "I am more upset about this program because it doesn't help those who work and keep current. It seems we are working to bail everybody else out."
Do you qualify for a principal reduction or a modification under the foreclosure settlement? We want to hear from you. Send your story and contact information to Leslie Christie and you could be featured in an upcoming article on CNNMoney.
Correction: An earlier version of this story said the amount allocated to refinancing loans was $3.7 billion. The amount is actually closer to $3 billion. 
| Overnight Avg Rate | Latest | Change | Last Week |
|---|---|---|---|
| 30 yr fixed | 3.80% | 3.88% | |
| 15 yr fixed | 3.20% | 3.23% | |
| 5/1 ARM | 3.84% | 3.88% | |
| 30 yr refi | 3.82% | 3.93% | |
| 15 yr refi | 3.20% | 3.23% |
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