Efforts between federal regulators and major banks to reach a settlement that could help American homeowners in foreclosure came to fruition as a settlement was announced today. The agreement calls for five major banks, Bank of America (BAC), Citigroup (C), JP Morgan Chase (JPM), Wells Fargo (WFC), and privately-held Ally Financial, to pay $26 billion to homeowners affected by the practice of robo-signing mortgages.

“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 HUD Secretary Shaun Donovan.

Payment for Past Abuses

The bank paying the majority of the settlement is Bank of America, which will be shelling out $11.8 billion. Wells Fargo will pay $5.4 billion, JP Morgan $5.3 billion, Citigroup $2.2 billion, and Ally will pay $310 million. These five banks, collectively, control payments on 55 percent of all outstanding home loans. The deal appeared to be in trouble yesterday as key states like California and New York were poised to withhold support, but those states have apparently overcome their issues with the plan and signed on.

The settlement marks the end of a year-long push by regulators to make banks pay for their abuses. In 2010, the foreclosure process hit a major snag when it was revealed that banks were routinely submitting bogus mortgage documents due, in part, to their practice of “robo-signing” forms in an effort to hasten the foreclosure process.

“This isn’t just about punishing banks for their irresponsible behavior,” Housing and Urban Development Secretary Shaun Donovan said at a Washington news conference. “It’s also about requiring them to help the people they harmed by funding efforts to help homeowners stay in their homes.”

Magic Pill for Housing Market?

“No action, no matter how meaningful, is going to by itself entirely heal the housing market,” President Obama said in remarks at the White House. “But this settlement is a start.”

While initial excitement about the deal appears high, there’s serious questions about just how much the $26 billion will really mean to a housing market that has lost nearly one third of its total value over the last five years. This has left 11 million homeowners under water on their mortgages by some $750 billion, making many analysts speculate that the $26 billion settlement will be a drop in the bucket despite more than $20 billion of the settlement going to cutting loan balances for borrowers at risk of foreclosure.

“It is frankly a headline victory for both banks and attorneys general with a modest impact on the housing market,” said Joshua Rosner, managing director of investment firm Graham Fisher & Co. Guggenheim Partners analyst Jaret Seiberg echoed this sentiment, stating that “We believe any initial euphoria over the deal will quickly fade as investors realize the flood of additional mortgage-related litigation that the major banks face.”

However, scoring a win for homeowners over major banks for suffering home owners carries a certain symbolic importance if nothing else, and many are celebrating the win. “The bottom line about this settlement, is it’s okay, it’s a step forward, it’s a step in the right direction. But let’s not kid ourselves, there’s a hell of a lot more that needs to be done,” said Ira Rheingold, executive director of the National Association of Consumer Advocates. Iowa Attorney General Tom Miller agreed, saying in a news conference that “This agreement has more to help homeowners than anything we’ve ever seen before.”