Five of the country’s largest banks last week agreed to pay out $25 billion to settle a lawsuit brought by state and federal authorities seeking relief for the millions of people who lost their homes to foreclosure in recent years.

The agreement is expected to direct nearly $318 million in funds to Massachusetts households struggling to keep or recover their homes, although city officials and activists say the settlement is only a first step towards stabilizing the housing market throughout the state.

Massachusetts Attorney General Martha Coakley joined 48 other states in the suit against Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial over questionable loan policies in which servicers routinely signed foreclosure documents without the oversight of a notary public or confirming that the documents were factual.

Under the settlement, approximately $15 million has been set aside for the roughly 7,500 Massachusetts residents who lost their homes between Jan. 1 2008 and Dec. 31 2011. The funds will likely be distributed in $2,000 increments as compensation to homeowners who may have been victims of wrongful foreclosure.

While Coakley acknowledged that some homeowners eligible for the funding were probably foreclosed on legally, she said the payment was “compensation for that time of uncertainty with the [foreclosure] process itself.”

In addition, the settlement set aside about $224 million for Massachusetts borrowers currently behind on home loans payments and facing an imminent risk of foreclosure. This fund will help at-risk homeowners lower monthly payments and adjust a small percentage of principle reduction payments which officials expect would drop the average mortgage by about $20,000, bringing mortgage debt closer to their actual market value.

The five banks named in the settlement will also need to modify loan payments by a total of $33 million for homeowners who are currently up-to-date on mortgage payments but owe more money than their home’s current market value.

Finally, banks will need to make a direct $46 million payment to the state, which will pay for legal fees and a compliance program to ensure funds actually reach homeowners in need. Any money left over from the compliance program will be directed towards either additional loan modifications or principle reduction payments.

The settlement timelinecalls for an administrative and compliance system to be determined in the next sixty days. Impacted homeowners who apply for relief will receive notice about their eligibility six to nine months later. Payments are expected to be fully distributed over the course of three years.
 
While housing activists and city officials agree the settlement marks the first formal recognition of lenders’ role in the housing meltdown and its subsequent economic fallout, questions remain about how funds will be distributed throughout the state.

Calling the newly-available funds “welcomed relief,” City Councilor Charles Yancey said the settlement’s policy implications will play a larger role than the amount of money offered to individual families.

“It may not be the sums of money people may have imagined and I’m sure it’s not going to make anyone whole,” Yancey said. “But it’s a very important recognition of the fraudulent activity that has put so many families in distress.”

The finer points of the settlement — especially how the funds will actually be distributed —are still being finalized, according to Boston Department of Neighborhood Development (DND) director Evelyn Friedman, who does not yet know if her office will have a direct role.

Friedman said that on a national level, the $25 billion settlement package could help kick-start the slumping housing market by stabilizing home ownership for families walking a tightrope on their mortgage payments. But Frideman added that the principle reduction option would only make a difference for families on a case-by-case basis, depending on how far behind they have fallen on payments.

Bob Garret, the deputy director of policy development and research for DND, said the settlement could make the biggest difference for homeowners in Dorchester and Roxbury, which saw some of the largest fluctuations in the home values over the past decade. Garrett said that during the boom years in the middle 2000s, the large stock of three-decker style homes in both neighborhoods made attractive purchases for speculative buyers who could turn a profit by converting homes into multi-unit condominiums.

A three-decker currently occupied by members of the anti-foreclosure group City Life/Vida Urbana located on Fowler Street near the Blue Hill Avenue Corridor stands as a prime example of the bubble’s impact on home values.

Assessed in 1985 at $40,000, the three-family home saw a nearly $100,000 increase in assessed value between 2003 and 2004 from $217,000 to $305,000, ultimately topping out at $439,000 by 2007. Since that time, the home’s value dropped to $268,000 in 2011 when it went into foreclosure and was ultimately sold at auction for $163,000.

With nearly 100 homes now in various stages of the foreclosure process within a 10-block area around Fowler Street, City Life activists believe the settlement, while a promising move forward, could be too little, too late.

City Life-Vida Urbana’s director Curdina Hill said the majority of her organization’s members are currently paying mortgages with principles between $100,000 and $200,000 more than their properties’ actual values. A blanket payout of $20,000 to qualified borrowers would do little to improve their chances of staying in their homes, Hill said.

Still, City Life is encouraging its members to pursue the settlement money by contacting their lenders and ultimately the Attorney General’s office if they feel they are not being adequately served by their bank. Hill said the organization will continue to push for further financial penalties for lenders in the future.

“Most of the conversation has been people’s anger and disappointment about the fact that the banks aren’t being held accountable,” Hill said on Tuesday before a weekly City Life organizational meeting in Jamaica Plain. “They’re focused less on ‘how do I get this money’ than ‘this is not an adequate solution’ and anger that so many attorney generals were not willing to push for a bigger settlement from the banks. That’s what you’re going to hear tonight: people’s anger.”