The government’s $25 billion settlement Thursday with banks over fraudulent foreclosure practices begins a long-promised reckoning with the financial industry over its role in the worst economic crisis since the Great Depression, officials said.

The deal represents the largest industry settlement since an agreement with tobacco companies in 1998 and will force five of the nation’s largest banks to overhaul their mortgage-servicing practices and reduce loan balances for many borrowers who owe more than their houses are worth.

FAQ: The foreclosure settlement

Officials acknowledged that the final sum will reach only a fraction of homeowners across the country whose homes are collectively worth $750 billion less than what is owed on their mortgages. But they argued that it was a meaningful step in healing the housing market.

The priority of the settlement was not to punish banks, officials said. Another wave of punishment is on its way, they vowed.

“This is neither the beginning nor the end of our work to hold banks and other institutions accountable for the destruction they’ve caused families, communities and country,” said Illinois Attorney General Lisa Madigan. “Today’s settlement should serve as a warning.”

The deal was brought on by revelations that banks were using forged and shoddy paperwork to foreclose rapidly on struggling homeowners, a practice known as “robo-signing.” Outrage over those practices led to 16 months of settlement talks between state and federal officials and five large banks.

The officials who crafted Thursday’s settlement were careful to leave the door open to a wide range of future litigation, despite efforts by banks to shield themselves from such legal actions. It allows for future actions over fair-housing and fair-lending violations, as well as civil rights claims. It doesn’t bar individuals from joining class-action lawsuits. Nor does it limit the lawsuits that private investors can file in search of damages, some of which have already been launched.

That means the legal hangover from the mortgage bubble is probably far from over for many of the country’s largest banks.

Last September, federal regulators launched a broad legal assault on 17 big banks, claiming they sold nearly $200 billion in fraudulent mortgage investments to housing giants Fannie Mae and Freddie Mac.

Since then, as the housing slump has continued to weigh down the larger economy and movements as disparate as the tea party and Occupy Wall Street have raged against the lack of accountability for the crisis, the pressure for regulators to hold individuals and institutions accountable has only grown.

New investigative unit

President Obama announced in his recent State of the Union address a new unit that would would “expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis.” Days later, Attorney General Eric H. Holder Jr. said the Justice Department had issued civil subpoenas to 11 financial institutions.

Helping to lead the new investigative unit is New York Attorney General Eric Schneiderman, who for months had been critical of the foreclosure settlement because of concerns that it might prevent deeper investigations into mortgage misdeeds and could let banks off too easily.

Schneiderman, who ultimately signed on to Thursday’s settlement, last week filed lawsuits against several banks, claiming that they deceived homeowners and court officials by filing bogus documents through a popular electronic mortgage registry. He and his counterparts from states such as California, Delaware, Massachusetts and Nevada have vowed to press forward with their inquiries — an approach that has been cheered by liberal groups and consumer advocates.

Separately, the Securities and Exchange Commission is examining whether banks fully disclosed the risks to investors who bought packages of loans that financed the housing boom. The agency has continued digging for evidence that firms failed to disclose important information when selling the securities to investors, SEC enforcement director Robert Khuzami said recently. The SEC also has sent banks a flurry of requests for documents and interviews with witnesses.

Goldman Sachs settled an SEC complaint for $550 million in 2010, but its last quarterly report — like those of other banks — describes a variety of pending lawsuits and government investigations that the firm faces. “There remains significant uncertainty surrounding the nature and extent of any exposure for participants in this market,” Goldman said in the report.

The passage of time since the housing crash first hit could affect the government’s ability to impose penalties on financial firms. Generally speaking, under a statute of limitations, the SEC can only obtain penalties for fraud within the past five years. But the SEC and other agencies could argue that the clock didn’t start ticking until it was apparent that fraud occurred.

Thursday’s settlement, which would require a judge’s consent, won approval from 49 states. Oklahoma was the lone holdout.

Under the terms of the deal, banks would have three years to complete principal writedowns, refinancings and other relief. It provides incentives for actions taken within the first 12 months so that the aid can get to homeowners sooner rather than later.

The settlement also includes about $17 billion that would go toward foreclosure-prevention measures, such as lowering the loan balance for borrowers who owe more than their homes are worth. Other provisions would provide for lowering interest rates for homeowners who are current on their loans. In addition, as many as 750,000 borrowers who lost their homes to foreclosure since 2008 would be eligible for payouts of about $2,000 each.

The five banks at the heart of the settlement are Wells Fargo, Bank of America, J.P. Morgan Chase, Ally Financial and Citigroup. Ultimately, the amount of aid to homeowners could reach $40 billion, officials said, adding that they hope other banks will soon sign similar agreements and adopt the new standards set out by the deal.

Consumer impact uncertain

Several Washington area housing counselors said the deal would probably do little to help their clients but that they needed to learn the details of the aid to be sure.

Cherelle Silue, manager of housing services at United Communities Against Poverty in Prince George’s County, said her first impression is that a homeowner could wind up not getting much.

For homeowners who are trying to catch up on their mortgages, “we are talking thousands and thousands of dollars,” Silue said. “I am sure that it is going to be able to help someone, but I am not sure how many.”

In any case, the celebrations among state and government officials over a significant settlement for homeowners on Thursday included numerous reminders that the victory marked a beginning rather than an ending.

“This settlement also protects our ability to further investigate the practices that caused this mess. And this is important,” Obama said at White House, adding: “We’re going to keep at it until we hold those who broke the law fully accountable.”

Staff writers David S. Hilzenrath, Sarah Kliff, Luz Lazo and Jeremy Borden contributed to this report.