WASHINGTON - Massachusetts, California, and New York were considering yesterday whether to join most other states in backing a long-awaited settlement with banks over foreclosure abuses. The deal would require the five largest mortgage lenders to reduce loans for about 1 million households.
State attorneys general had set a deadline of the end of yesterday for states to join the settlement. Homeowners in states that opt out of the deal would not share in the settlement money.
The reduced loans would benefit homeowners who are behind on their payments and owe more than their homes are worth. The lenders would also send checks for about $2,000 to hundreds of thousands of people who lost homes to foreclosure.
The money available to homeowners could run as high as $25 billion if all states OK the deal.
The five lenders - Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial - have already agreed to the settlement. In settling the charges, the states would agree not to pursue further investigations against the banks in civil court. The deal would not protect the banks from criminal investigations.
Attorney General Tom Miller of Iowa, who has been helping to lead the negotiations, said last night that more than 40 states had signed on. “This enables us to move forward into the very final stages of remaining work,’’ he said, adding that negotiators continued to finalize details.
The few states that have resisted the deal have expressed concern that it would limit their ability to take action against the banks for any past wrongdoing that turns up later.
California’s backing is particularly crucial. . . . It has the most residents underwater.
In early December, Attorney General Martha Coakley of Massachusetts sued the five major banks for allegedly illegally seizing properties, filing fraudulent foreclosure documents, and failing to help struggling borrowers who could have stayed in their homes if they had been allowed to make lower mortgage payments.
Coakley has said she would consider the settlement agreement but was worried that the deal would not do enough to help troubled homeowners in Massachusetts. For example, she worried that the settlement amount would become a maximum level of help that lenders would give homeowners rather than a sizable settlement.
Coakley’s spokesman Brad Puffer declined to comment yesterday. But housing advocates in touch with her office said staff attorneys were attempting to reach an agreement.
“In a perfect world they can get the benefit of this settlement, but also be able to pursue the [legal] claims,’’ said Ira Rheingold, executive director of the National Association of Consumer Advocates in Washington, D.C. “They’ve got a very serious lawsuit.”
California’s backing is particularly crucial. It was among the states hardest hit by the foreclosure crisis. And it has the most residents underwater: They owe more on their loans than their homes are worth. Without California’s participation, the money available to homeowners nationally would be about $19 billion rather than $25 billion.
The settlement has been toughened in recent days to allow states to pursue lenders who mistreat borrowers in the future. Fines could run as high as $5 million per violation.
“We are closer now than we’ve been before, but we’re not there yet,’’ Attorney General Kamala Harris of California said in a statement over the weekend.
Under the deal, the mortgage principal for about 1 million homeowners would be written down by an average of $20,000. An additional 750,000 Americans - about half the households eligible for aid under the deal - would receive about $2,000.
David Stevens, chief executive of the Mortgage Bankers Association and a former Obama administration housing official, said the deal would ease lending restrictions for new loans and aid homeowners at risk of foreclosure.
“This will have a role in providing certainty to the [financial] markets about credit being eased and homeowners getting some money back,’’ Stevens said.
Still, several housing and community organizations have complained that the settlement would not go far enough.
George Goehl of the National People’s Action, a collection of community housing groups, said $25 billion for homeowners would be a “paltry down payment,’’ considering that roughly 11 million homes are underwater by a combined $750 billion.
“Anything less than $300 billion is a win for the 1 percent that lets the banks off too easily and falls short of helping both middle-class families and communities targeted most by big bank fraud,’’ Goehl said.
But if California and New York agree to the deal, other holdouts, including Arizona and Nevada, would likely follow suit. The settlement would end a painful chapter that emerged from the 2008 financial crisis, when home values sank and millions edged toward foreclosure. Many companies that process foreclosures failed to verify documents. Some employees signed papers they had not read or used fake signatures to speed foreclosures - known as robo-signing.
The agreement also promises to reshape longstanding mortgage lending guidelines. It would make it easier for those at risk of foreclosure to make their payments and keep their homes.
Those who lost their homes to foreclosure are unlikely to get their homes back or benefit much financially from the deal.Jenifer B. McKim of the Globe staff contributed to this report.