"We have reached a landmark settlement with the nation's largest banks" which will "begin to turn the page on an era of recklessness," Obama said.
The bad lending practices and foreclosure abuses "cost more than 4 million families their homes to foreclosure," the president said.
The complaints of widespread foreclosure abuses surfaced in late 2010 and revolved around "foreclosure mills," legal firms that processed foreclosure paperwork so quickly they were shortchanging homeowners on due process. A familiar complaint was called "robo-signing," which implied documents were signed without anyone reading them.
"These practices were plainly irresponsible and we refused to let them go unanswered," Obama said.
Only Oklahoma declined to participate in the settlement.
The agreement requires servicers to implement comprehensive new mortgage loan servicing standards and commit $25 billion to resolve violations of state and federal law and to change foreclosure procedures.
The three-year agreement covers Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc. (formerly GMAC).
"There are consequences for engaging in practices that jeopardize the stability of our community," Illinois Attorney General Lisa Madigan said Thursday at a Washington news conference announcing the settlement.
"This agreement -- the largest joint federal-state settlement ever obtained -- is the result of unprecedented coordination among enforcement agencies throughout the government," Attorney General Holder said. "It holds mortgage servicers accountable for abusive practices and requires them to commit more than $20 billion towards financial relief for consumers.
"As a result, struggling homeowners throughout the country will benefit from reduced principals and refinancing of their loans. The agreement also requires substantial changes in how servicers do business, which will help to ensure the abuses of the past are not repeated."
"This historic settlement will provide immediate relief to homeowners -- forcing banks to reduce the principal balance on many loans, refinance loans for underwater borrowers, and pay billions of dollars to states and consumers," said Shaun Donovan, secretary of the Department of Housing and Urban Development. "Banks must follow the laws."
At least $10 billion of the settlement will go toward reducing the principal on loans for borrowers who are at risk of default and whose mortgages are underwater. Those borrowers will be eligible for refinancing to reduce interest rates. As much as $7 billion will go toward other forms of relief, including forbearance of principal for unemployed borrowers, anti-blight programs, short sales and transitional assistance, benefits for service members forced to sell their homes at a loss as a result of a Permanent Change in Station order, and other programs. Some $5 billion will go to the states and $1.5 billion will be set aside to provide cash payments to borrowers who lost their homes from Jan. 1, 2008, to the end of last year.
"It is frankly a headline victory for both banks and attorneys general with a modest impact on the housing market," Joshua Rosner, managing director of investment firm Graham Fisher & Co. told The Wall Street Journal.
No action will entirely heal the housing market, Obama said, "but this settlement is a start."
"Congress still needs to send me the bill I proposed" that concerns refinancing underwater mortgages, he said. "It's only going to happen if Congress musters the will to act."