Arizona will get $1.6 billion of the nationwide $26 billion pact to settle claims that mortgage lenders acted improperly and illegally. That's the third-largest chunk of the settlement, after only California and Florida. The biggest piece of the state's share - $1.3 billion - is earmarked to help those who owe more than their property is worth, state officials said Thursday.

Who qualifies?

The deal affects only those who have mortgages from five companies: Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally Financial, formerly known as GMAC. Those with mortgages held by others, including Fannie Mae and Freddie Mac, will not share in the settlement.

Most of Arizona's settlement money will go to pay down the principal owed by qualifying homeowners. That group includes homeowners who owe more than their homes are now worth. They must have a "loan-to-value" ratio of 175 percent, meaning the amount owed is equal to 1.75 times what the house is worth.

They also must be current on their mortgages. Arizona Attorney General Tom Horne said it would be irresponsible to reward those who have fallen behind.

Horne could not spell out exactly how much help any one borrower would get, saying each lender will have to set its own standards. Banks could choose to do many small reductions in principal or just a few larger write-downs.

Available relief

Some of that $1.3 billion could be used to facilitate "short sales," allowing the home to be sold when the mortgage balance exceeds the value of the property without ruining the credit rating of the borrower.

Other options include:

• Allowing homeowners who have lost their jobs to skip payments until they're re-employed.

• Relocation assistance for homeowners facing foreclosure.

• Money to fix up "blighted" properties.

The deal includes another $110 million for those who lost their homes in foreclosure between 2008 and the end of 2011 because of lender misconduct. Horne said he does not know how many are affected but believes the cash payments should work out to about $2,000 apiece.

Horne said that to qualify, former homeowners must allege that they were dealt with unfairly by the lender.

"They won't have to prove it, but check off a box that they feel they were subject to (loan) servicer abuse," he said.

Mortgage reduction

A total of $85 million is available for interest-rate reductions - but not for everyone.

To qualify, a homeowner must have a mortgage with an interest rate of at least 5.25 percent. Nothing in the settlement spells out how low that rate would go.

But Horne said there are incentives for lenders to move the rate down low enough so the monthly payment drops by at least $100.

Settlement background

Thursday's deal came after Horne settled a separate lawsuit the state filed in 2010 against Bank of America alleging various types of fraud.

Horne said that had to come first, as the national pact absolves the five lenders of any future civil liability. If Arizona had signed the national deal first, it would have forfeited any chance of a separate recovery.

As it is, Bank of America has agreed to pay the state another $10 million.

Some of that will go to individuals who were harmed by the bank's foreclosure activities. And some of it will go to efforts by Horne's office to prosecute financial fraud.