What the California mortgage settlement means for homeowners

California’s settlement with five banks involved in the foreclosure crisis requires the banks to put $12 billion toward helping homeowners who owe more than their homes are worth.

For those still wading through their loans, there are two options: reducing the principal on the loan or putting the house up for a short sale. Michael Troncoso of the state attorney general's office says homeowners' choices will depend on their circumstances.

"Some borrowers are so behind on their payments and they’ve been behind for so long, they really want to move on from the home," said Troncoso, explaining that they'll likely prefer short sales.

But for many of them, he adds, a short sale won’t be easy.

"They’re so deeply underwater, the only way to motivate a short sale and allow them a dignified and organized exit from the home without massive debt is to reduce the principal balance on the loan," according to Troncoso.

More than 2 million California homeowners are underwater. The settlement will help about 250,000 of them, leaving seven-eighths of debtors to their own devices. It applies only to mortgages owned by Bank of America, JP Morgan Chase, Wells Fargo, Citigroup and Ally Financial.

The office of the attorney general is also fighting Fannie Mae and Freddie Mac, owners of most of California’s mortgages, to reduce the principal on their loans, too.