The central bank said borrowers could be eligible for payments of "hundreds of dollars up to $125,000, depending on the type of possible servicer error."
In the settlement, $3.3 billion is to go to direct payments to eligible borrowers and $5.2 billion is to be used in other forms of mortgage assistance, such as loan modification, the Fed said.
The Fed and the Office of the Comptroller of the Currency had ordered the 10 banks to undertake loan reviews after widespread foreclosure abuses were discovered as banks tried to process a mountain of foreclosures that arose during the recent recession.
Many banks hired so-called "foreclosure mills," that went through the foreclosure process so quickly, they were accused of cheating homeowners of due process entitled by law.
The loan reviews were set up for banks to self-police the loans for errors. But the reviews proved time consuming and costly. That prompted the settlement in which "the participating servicers would cease the Independent Foreclosure Review, which involved case-by-case reviews, and replace it with a broader framework allowing eligible borrowers to receive compensation significantly more quickly," the Fed said.
The agreement covers more than 3.8 million borrowers whose homes were in foreclosure in 2009 and 2010.
The banks involved include Aurora, Citibank, JPMorgan Chase, MetLife Bank, PNC, Sovereign, SunTrust, U.S. Bank, Wells Fargo, and Bank of American which announced Monday that it had reached a $10 billion settlement with the Federal National Mortgage Association to close down a dispute over mortgages that did not meet Fannie Mae's standards.
In a statement released Monday, Fannie Mae said BofA would buy back 30,000 mortgage loans originated from Jan. 1, 2000, through Dec. 31, 2008, at "par plus accrued interest," spending about $6.75 billion to do so, and pay $3.55 billion to cover bank fees.
The comprehensive agreement also includes Fannie Mae granting Bank of American permission to transfer servicing rights on 941,000 mortgage loans to other financial firms. In a statement BofA said the loans involved in that part of the agreement were worth $306 billion.
"A favorable resolution of this long-standing dispute between Fannie Mae and Bank of America is in the best interest of taxpayers," said Fannie Mae Executive Vice President and General Counsel Bradley Lerman.
"Together, these agreements are a significant step in resolving our remaining legacy mortgage issues, further streamlining and simplifying the company and reducing expenses over time," said BofA Chief Executive Officer Brian Moynihan.
Moynihan said the bank was "resolving legacy mortgage issue," concerning loans granted by BofA and by Countrywide Financial Corp., which BofA purchased in July 2008.
The Fed said it was working to put foreclosure issues to rest with banks other than the 10 involved in Monday's settlement.