“Countrywide’s greed turned the American dream into a nightmare for thousands of Californians who now face foreclosure,” said state Attorney General Jerry Brown, who led the negotiations for the states with Lisa Madigan, the Illinois attorney general.

Countrywide was sued by a handful state attorneys general, who alleged that the Calabasas, Calif., company engaged in predatory lending practices by misrepresenting loan terms and borrowers’ ability to afford loans.

California Attorney General, Jerry Brown entered into a settlement with Bank of America, new owner of Countrywide Home Loans has agreed to the nation’s largest loan-modification program to settle charges of lending abuse brought by California and other states. The new pact may help an estimated 125,000 Californians who are struggling with toxic mortgages and will offer interest rate and loan principal reductions plus other distressed borrower relief valued at $8.4 billion to settle consumer fraud complaints from 11 states.

Other states in the settlement are Arizona, Connecticut, Florida, Iowa, Michigan, North Carolina, Ohio, Texas and Washington. It is the largest predatory lending settlement in history, far exceeding the $484 million deal struck in 2002 with the Household Finance Corp.

“It’s not perfect,” Brown said Sunday, “but we have some money for people who already have been kicked out of their homes, and we have money for people who may get foreclosed on later. And there are some very significant payment reductions for people. This will allow them to stay in their homes.”

Under the settlement, borrowers whose first payment was due between Jan. 1, 2004, and Dec. 31, 2007, can participate. The loan balance must be at least 75 percent of the current value of the home, and the borrower must be able to afford the adjusted monthly payments.

The program will focus on borrowers who were placed in the riskiest loans, including adjustable-rate mortgages whose interest rates reset significantly several years after the loans were made. Pay-option mortgages, under which a borrower must pay only a small fraction of the interest and principal, thereby allowing the loan balance to increase, also are included in the loan modifications.

The options on subprime mortgages also include keeping the initial rate for five or 10 years, having the borrowers pay interest only and reducing the interest rate to as low as 3.5%.

For pay-option loans, many of which now amount to more than the borrower’s house is worth, the options include writing the principal down to 95% of the home’s current appraised value and lowering the interest rate to 3.5%.

Under the terms of the settlement, Countrywide Home Loans will reduce principal balances in some cases and cut interest rates in others. Rates could decline to 2.5 percent, depending upon a borrower’s ability to pay, and remain at that level for five years. Then the rate will adjust to prevailing interest rates charged by Fannie Mae on its fixed-rate mortgages.