Michelle Fust has been working two jobs trying to keep up with the payments on her Columbia Heights house, which she believes is worth nearly $60,000 less than she owes on it.

Thursday morning, the single mother felt a rush of optimism when federal officials announced a $25 billion settlement with five of the nation's biggest mortgage lenders to reimburse some homeowners and overhaul their industry in the wake of the burst housing bubble.

The deal with Bank of America, J.P. Morgan Chase, Wells Fargo, Citigroup and Ally Financial could help at least 25,000 homeowners in Minnesota. The state will have access to about $280 million, including up to $113 million in monetary and refinancing relief and up to $167 million in principal reductions and other homeowner relief, according to Attorney General Lori Swanson.

Certain borrowers who lost their homes to foreclosure could get a $2,000 refund, and banks have been ordered to speed up the notoriously slow short-sale process.

"Ordinary homeowners struggling to make ends meet in the bad economy have routinely faced corporate red tape and callous disregard when asking the big national banks for help," Swanson said in a statement. "This settlement gets some money back to people who have been hurt by the big five banks and hopefully will help others trying to work out loan modifications down the road."

Swanson said she is particularly hopeful that the settlement will help people who have watched the value of their homes -- and their net worth -- plummet because of a foreclosure crisis they didn't cause.

Critics say the deal doesn't go far enough.

Prentiss Cox, a University of Minnesota law professor who has been working on mortgage-related issues for the past several years, blamed the Obama administration's decision to approach the foreclosure problem "as a voluntary venture with industry instead of as a New Deal-style emergency that requires a strong public hand to correct abuse."

Wells Fargo, the state's largest mortgage lender, said it plans to commit $5.3 billion to the settlement, including about $3.4 billion to help customers modify mortgages.

An end to robosigning

The settlement stems from allegations that mortgage lenders failed to appropriately verify foreclosure documents and weren't responsive to borrowers who sought assistance. Some employees signed papers they hadn't read or used fake signatures to speed up the process.

The settlement applies only to privately funded mortgages and doesn't include those mortgages that the government guaranteed through Fannie Mae and Freddie Mac. For example, only 20 percent of all the mortgages serviced by Wells Fargo are owned by the company, according to spokesman Tom Goyda.

Housing experts warned that it may take months, even years, before individual homeowners could get relief under the settlement. Fust, 47, will welcome the opportunity whenever it comes. A customer service representative for a financial planning company and a waitress, she is hopeful that her loan with Bank of America will qualify her for help.

"I understand that I signed the papers to do the refinancing," Fust said. "I'm not walking away from my house ... I don't want to do that to the neighborhood. I don't want to do that to my kids. I've worked my butt off ... they won't cut me a break."

While she takes responsibility for the cash-out refinancing she took on her small house by the railroad tracks, Fust said she hopes to get a lower mortgage rate than the 8.5 percent she's paying now.

A much-needed lift?

The agreement, which must be approved by a federal judge, was being hailed Thursday in the Twin Cities as a step in the right direction.

Chris Galler, chief executive of the Minnesota Association of Realtors, said the settlement should help lift the local housing market. A provision that requires lenders to respond more quickly to homeowners who want to sell their houses for less than they owe on them, known as short sales, will help reduce the number of the homes that end up in foreclosure.

Nearly half of homes on the market last month were foreclosures or short sales, a trend that has continued to push prices down. The median sale price of $140,000 in the Twin Cities during January was nearly the lowest in a decade.

Ed Nelson, communications manager for the Minnesota Home Ownership Center, said he's taking a wait-and-see approach to the new aid. "It will take time to get down to street level," Nelson said.

The agreement covers only some of the thousands of homeowners who need help, he said. "For some specific homeowners this will be a game changer, but more than likely will not be a game changer for the overall housing market."

The fine print

Specifics about the monetary and refinancing relief in Minnesota include:

• Borrowers who were foreclosed between Jan. 1, 2008, and Dec. 31, 2011, will be eligible for refunds estimated at about $2,000 if they lost their home due to financial hardship and while either trying to save it through a modification or because there were errors in the foreclosure process. Minnesota's estimated portion of this part of the settlement is about $33.9 million.

• Borrowers may file a claim for monetary relief if they were harmed by bank practices. Minnesota's portion is valued at about $43.4 million.

• A refinance benefit allows borrowers to refinance at a lower interest rate if they are current on their mortgage and have no delinquencies in the past 12 months, are "underwater" on their mortgage (owe more than the home is worth), originated their loan prior to Jan. 1, 2009, and are paying an interest rate of at least 5.25 percent. Minnesota's portion is valued at about $36 million.

Staff writer Paul Walsh contributed to this report. jim.buchta@startribune.com • 612-673-7376 pam.louwagie@startribune.com • 612-673-7102