(Bloomberg News) The $25 billion settlement with banks over foreclosure abuses may trigger a wave of home seizures, inflicting short-term pain on delinquent U.S. borrowers while making a long-term housing recovery more likely.

Lenders slowed the pace of foreclosures as they negotiated with attorneys general in all 50 states for more than a year over allegations of faulty and fraudulent paperwork used to repossess homes. With today's agreement, banks are likely to resume property seizures.

"The best thing about the settlement, frankly, is that it will be done," said Stan Humphries, chief economist for Seattle-based Zillow Inc., a provider of home-sales data. "The shadow of the settlement hung over the market for a year now."

The backlog of foreclosures has trapped homeowners in properties they can no longer afford, depressed prices by increasing the number of abandoned properties and led banks to tighten mortgage credit standards because of uncertainty about their potential obligations. New foreclosures fell 46 percent in December from October 2010, when the investigation into the so- called robo-signing of mortgage documentation began, according to Irvine, California-based RealtyTrac Inc.

The agreement will direct $17 billion to writing down debt to buffer some homeowners from foreclosure. About 11 million U.S. homeowners owe more on their mortgages than their homes are worth, according to CoreLogic Inc., a Santa Ana, California- based real estate data provider. That has limited their ability to sell or refinance and reduced the incentive to keep paying.

Principal reductions may help cut the number of mortgage defaults by improving homeowners' finances and reducing incentives for so-called strategic default, when homeowners walk away from a property because they have too much negative equity in their homes, according to a Federal Reserve report sent to Congress on Jan. 4.

U.S. homeowners have $750 billion in negative equity, Humphries said. The settlement will help the housing market "at the margins, but little more," according to an analysis late last month by London-based Capital Economics of the impact of the settlement on housing.

"There has been a lot of discussion of principal reductions and whether that's the one measure the U.S. housing market needs to get it going again," Paul Diggle, a property economist at Capital Economics, said in a telephone interview this week. "That may well be the case. But the amounts of principal reductions under the settlement seem small."

Lowering Interest Rates

The agreement announced today includes $5 billion in cash for states to pay for foreclosure-prevention initiatives. Loan servicers will refinance $3 billion in refinancings to lower homeowners' interest rates and pay about $1.5 billion to homeowners harmed by botched foreclosures.

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