But the agreement could reshape long-standing mortgage lending guidelines and make it easier for those at risk of foreclosure to restructure their loans. And roughly one million homeowners could see the size of their mortgage reduced.
Five major banks - Bank of America, JPMorgan Chase, Wells Fargo, Citibank, and Ally Financial - and U.S. state attorneys general could adopt the agreement within weeks, according to two officials briefed on the discussions. They spoke on condition of anonymity because they are not authorized to discuss the agreement publicly.
The settlement would be the biggest of a single industry since the 1998 multistate tobacco deal. And it would end a painful chapter that grew out of the 2008 financial crisis.
Nearly eight million Americans have faced foreclosure since the housing bubble burst. In some cases, companies that process mortgages failed to verify the information on foreclosure documents. The worst practices, known collectively as "robo-signing," included employees signing documents they hadn't read or using fake signatures to sign off on foreclosures.
President Obama is expected to tout the settlement in his State of the Union address Tuesday. His administration has put pressure on states to wrap up a deal more than a year in the making.
But some say the proposed deal doesn't go far enough. They have argued for a thorough investigation of potentially illegal foreclosure practices before a settlement is hammered out.
New York, Delaware, Nevada, and Massachusetts have argued that banks should not be protected from future civil liability. The deal will not fully release banks from future criminal lawsuits by individual states.
In December, Massachusetts sued the five major banks over deceptive foreclosure practices.
Ian McConnell, director of the fraud division for Delaware Attorney General Beau Biden, said Monday that Biden was "opposed to the proposed settlement as drafted."
The settlement would only apply to privately held mortgages issued between 2008 and 2011, not those held by government-controlled Fannie Mae or Freddie Mac. Fannie and Freddie own about half of all U.S. mortgages.
As part of the deal, about one million homeowners could also get the principal amount of their mortgages written down by an average of $20,000. One in four homeowners with a mortgage - or roughly 11 million people - owe more than their home is worth. These "underwater" borrowers have little chance at refinancing.
Democratic attorneys general met Monday in Chicago to discuss the deal with Housing and Urban Development Secretary Shaun Donovan. Republican attorneys general were briefed via conference call later in the day.
Under the deal $17 billion would go toward reducing the principal that struggling homeowners owe on their mortgages, $5 billion would be placed in a reserve account for various state and federal programs (including the $1,800 checks to homeowners) and $3 billion would help homeowners refinance at 5.25 percent.