In the largest deal to date aimed at addressing the housing meltdown, federal and state officials on Thursday announced a $26 billion foreclosure settlement with five of the largest home lenders.

The settlement settles potential state charges about allegations of improper foreclosures based on "robosigning," seizures made without proper paperwork.

Most of the relief will go to those who owe far more than their homes are worth, known as being underwater on the loans. That relief will come over the course of the next three years, with the banks having incentives to provide most of the relief in the next 12 months.

At least $17 billion of the settlement will go to reducing the principal owed by homeowners who are both underwater and behind on their mortgages. Depending on which loans have the amount owed cut, the amount of principal relief could reach as much as $34 billion.

Federal officials say that portion of the settlement will provide relief for up to 1 million of the most beleaguered homeowners. But if that many homeowners get the amount they owe reduced, it would only be an average reduction of $17,000 in their principal.

Given the fact that many homeowners are far more underwater and will need steeper reductions in order to be able to afford their payments, the number of homeowners who receive help under this part of the program will likely fall far short of the 1 million mark.

Officials say up to 750,000 other homeowners who are underwater but are current on their mortgages will be able to refinance their current loans at lower rates. They will not receive a reduction in principal, but with mortgage rates now near record lows, they could receive substantial savings on their monthly payments. The settlement sets aside $3 billion to account for the reduced interest payments the banks will receive after the refinancing.

About $1.5 billion of the settlement will to go homeowners who had their homes foreclosed upon, which will come to about $2,000 per homeowner.

The five mortgage servicers who are parties to the settlement -- Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial -- will pay out $5 billion between them that will go to cover the those payments to foreclosed homeowners as well as payments to the states..

The deal is the second biggest settlement involving the states ever reached, trailing only the $206 billion settlement reached in 1998 between state attorneys general and the tobacco industry. And it dwarfs any settlements that major Wall Street firms have reached to settle other allegations of misdeeds related to the financial markets meltdown and the Great Recession.

Still it only will help a faction of those homeowners who are struggling with mortgages. There at 1.5 million homeowners who are 90 days or more delinquent on their mortgages but not yet in foreclosure, according to the most recent estimate from the Mortgage Bankers Association. And CoreLogic estimates that 11 million homeowners are underwater on their mortgages.

As of Wednesday night, at least 42 had signed on onto the settlement. which would yield as much as $26 billion available for qualified homeowners. The deal marks the largest housing relief available "underwater" homeowners whose principal exceeds their home's value, as well as those who have been foreclosed on, since the financial crisis began.

Under an earlier draft of the deal, some 1 million U.S. homeowners who are underwater on their mortgages could be eligible for as much as $20,000 in relief of principal owed, according to Secretary of Housing and Urban Development Shaun Donovan.

But the relief would only be available to those homeowners whose mortgages haven't been sold to the government-sponsored mortgage guarantors Fannie Mae and Freddie Mac.

In return, mortgage servicers in states that agree to the deal would get immunity from future state servicing and originating claims -- although homeowners could pursue claims against banks and states could still pursue criminal investigations.

New York's participation had been shaky this week, because some of the banks involved in the multi-state deal had also been sued by Attorney General Eric Schneiderman last week. Those banks -- Bank of America, Wells Fargo, JPMorgan Chase -- had also asked for a legal pass from Schneiderman's lawsuit, which accuses them of deceptive foreclosure practices for relying on the Mortgage Electronic Registration System.

On Tuesday, Schneiderman's office organized a media briefing to talk about the deal and then canceled it minutes before it was supposed to begin.

The deal is supposed to protect consumers when it comes to robosigning, and ensure that mortgage servicers agree to communicate better, avoid delays and give homeowners who are late on mortgage payments a fairer shake.

The big question throughout the negotiations was how much money would be available to help homeowners, which depended on how many states agreed to the deal. If all 50 states sign on, the mortgage servicing settlement has the potential to offer as much as $26 billion. California's participation raises the total settlement value by several billion dollars.

Generally, the attorneys general have been concerned that if they signed on to a deal, it would cripple their own investigations into mortgage cases.

At least one consumer advocacy group, the Center for Responsible Lending, has said the deal -- while "no silver bullet" -- leaves room to hold banks accountable in other mortgage probes, said Kathleen Day, a spokeswoman for the nonprofit.

But other left-leaning groups, including Move On and the New Bottom Line, are continuing to urge states to hold out for a big criminal investigation and a $300 billion settlement award.

--CNN's Jessica Yellin contributed to this story.