After months of painstaking talks, the nation's biggest banks have agreed to a $26 billion settlement that could provide relief to more than two million current and former American homeowners harmed by the bursting of the housing bubble, state and federal officials said. It is the latest effort by the government to halt the housing market's downward slide.

Despite the billions earmarked in the accord, the aid will help a relatively small portion of the millions of borrowers who are delinquent and facing foreclosure. The success could depend in part on how effectively the program is put into effect because earlier efforts by Washington to help troubled borrowers aided far fewer than had been expected.

Still, the agreement is the broadest effort yet to help borrowers owing more than their houses are worth, with roughly 1 million expected to have their mortgage debt reduced by lenders. In addition, 300,000 homeowners are expected to be able to refinance their homes at lower rates, while another 750,000 people who lost their homes to foreclosure from September 2008 to the end of 2011 will receive checks for about $2,000.

The final details of the pact were still being negotiated Wednesday night, including how many states would participate and when the formal announcement would be made in Washington. The two biggest holdouts, California and New York, now plan to sign on, according to officials with knowledge of the matter who did not want to be identified because the negotiations were not completed.

Other news organizations, including the Washington Post and USA Today, also reported the agreement.

N.C. Attorney General Roy Cooper has actively participated in the talks, and has expressed support for the draft agreement. N.C. Commissioner of Banks Joseph Smith is slated to be named monitor of the settlement.

How it began

The deal grew out of an investigation into mortgage servicing by all 50 state attorneys general that was introduced in the fall of 2010 amid an uproar over revelations that banks evicted people with false or incomplete documentation.

In the 14 months since then, the scope of the accord has broadened from an examination of foreclosure abuses to a broad effort to lift the housing market out of its biggest slump since the Great Depression. Four million Americans have been foreclosed upon since the beginning of 2007, and the huge overhang of abandoned homes has swamped many regions.

The settlement's five banks - Charlotte-based Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial - have set aside reserves for the expected cost of the accord and investors are likely to cheer its announcement, analysts said.

"I wouldn't say it's a panacea for the housing industry but it is good for the banks to get this behind them," said Jason Goldberg, an analyst with Barclays.

Banks ready with funds

Bank of America Chief Financial Officer Bruce Thompson said last month that the bank had set aside another $1.5 billion for litigation expenses, primarily regarding this settlement.

The deal will not substantially reduce the debt left from the housing bust, nor will it help everyone who may have been hurt by foreclosure abuses. About one in five Americans with mortgages are underwater, which means they owe more than their home is worth. On average, these homeowners are underwater by $50,000 each.

A recent estimate from the settlement negotiations put the average aid for each homeowner at $20,000.

"I just don't think it's going to be a life-changing event for borrowers," said Gus Altuzarra, whose company, the Vertical Capital Markets Group, buys loans from banks at a discount.

Not all of the aid would go to outright reduction of mortgage debt. Banks can also get credit for other types of relief like conducting short sales, in which a homeowner is allowed to sell a home for less than is owed, and refinancing underwater homeowners at lower rates.

Several billion dollars would cover the direct cash payments to foreclosure victims as well as providing money for states' attorneys general to services like mortgage counseling and future investigations into mortgage fraud.

Will it help?

Though many economists identify the moribund housing market as the greatest drag on the recovery, it is not clear how much the settlement will help.

Christopher Mayer, a housing expert at Columbia Business School, said the accord could give banks more certainty that they can clear their large backloads of seized homes, restoring the flow of those homes into the market.

"It may be good for individual homeowners, but if you don't do something to help the foreclosure process, it's not going to help the housing market," he said.

Mark Zandi, the chief economist for Moody's Analytics, said that while the settlement looked small compared to the scope of the problem, it was not necessary to erase all, or even most, of the nation's negative equity to turn the market around.

About a third of houses on the market now are distressed, or have been through foreclosure - reducing that percentage by just a small amount could be enough to put a floor under housing prices, he said.

Charlotte Observer staff writer Andrew Dunn contributed.