In a historic settlement, five of America’s largest banks have agreed to pay $26 billion to settle a lawsuit charging poor servicing of mortgages as they went bad and illegal use of automatic signature devices on legal documents for the years 2008-11.

Alaska is among 49 states that settled with the banks.

The settlement of the lawsuit, brought by states’ attorneys general in 2010, means many individuals in the midst of foreclosure proceedings will see the principal they owe on their mortgages shrink by as much as $20,000, reducing their monthly payments. The share of the settlement the banks will commit for principal reduction for struggling homeowners is $17 billion.

“Alaska is fortunate to have missed the real estate crash affecting many states in the Lower 48,” said Alaska Attorney General Michael C. Geraghty in a press release. “At the same time, some Alaskan families, through no fault of their own, are struggling to stay in their homes. This agreement not only provides financial relief to Alaskan borrowers, but puts in place important new protections for homeowners in the form of mortgage servicing standards.”

The banks have also agreed to give individuals who have lost their jobs a one-year grace period to find a new job before beginning foreclosure proceedings. They also designated $3 billion of the overall settlement to help homeowners refinance their loans at a 5.25 percent interest rate. Some 750,000 people who have already lost their homes may get a check for $1,800 as compensation for the banks’ behavior.

“This is a vindication for all consumers who experienced poor servicing of their mortgages or wrongful foreclosure,” says David Berenbaum, chief program officer at the Washington-based National Community Reinvestment Coalition, which tries to increase bank services in low- and middle-income communities. “This agreement is also likely to be the basis for national standards set by the new National Consumer Protection Bureau.”

A key aspect of the agreement is that the banks will modify not only first mortgages but also second mortgages, says Mr. Berenbaum. “This will help people to keep their homes,” he says, because often borrowers could not get both mortgages modified.

The agreement is being compared with the tobacco settlement in 1998. States' attorneys general had sued the tobacco industry, which agreed to pay the states $105 billion for past infringements in return for ending the lawsuits. The industry also agreed to change its marketing and advertising policies.

The agreement was announced Thursday morning at the Department of Justice, which monitored the talks among the states and the banks. All states but Oklahoma have signed on to the settlement deal. The states themselves will distribute the settlement money to their residents.

Housing and Urban Development Secretary Shaun Donovan called the agreement a “big victory for those who were harmed the most.” Iowa Attorney General Tom Miller, who coordinated the lawsuit, said it gives the banks an opportunity to change, “to do the right thing.” He noted that the effort was bipartisan.

The agreement – involving Bank of America, Wells Fargo, Ally Bank (formerly GMAC), Citibank, and JP Morgan Chase – may not put an end to litigation involving their actions. On Jan. 27, US Attorney General Eric Holder, Mr. Donovan, and other federal and state officials formed a federal group to investigate mortgage fraud and to seek compensation for people who have been wronged. Presumably, the federal officials can use much of the evidence uncovered by the states' attorneys general.

Not all of the agreement's ramifications are positive for homeowners in financial trouble, say foreclosure specialists. For some, it will speed the foreclosure process.

“The settlement should help clear the cloud of uncertainty that’s been hanging over the foreclosure process over the past 16 months, allowing lenders and servicers to more confidently move forward with delayed foreclosures when they have the proper documentation to do so as specified in the settlement,” wrote Daren Blomquist, a vice president of RealtyTrac, an Irvine, Calif., research firm, in an e-mail message.