* Claims over origination errors had been sticking point
* Refinancings proposed in exchange, pushing up price tag
* Deal could come by the end of the month
WASHINGTON, Oct 18 (Reuters) - Talks between U.S. states and top banks over mortgage abuses are nearing agreement on a major sticking point that has bogged down settlement negotiations for more than a year.
A deal could be reached by the end of the month, according to three people familiar with the talks.
Under the proposed terms of the settlement -- which could total $25 billion -- banks would get broad legal immunity from state lawsuits in exchange for refinancing underwater loans, those mortgages where borrowers owe more than their homes are worth, the sources said.
The deal could provide some relief to the battered U.S. housing market and clear up some uncertainty about banks' legal exposure that has been a drag on their shares.
Banks have been holding out on a multi-billion-dollar settlement because they wanted broader legal immunity than state attorneys general were prepared to offer.
Originally, the states were only considering immunity for shortcuts taken during mortgage servicing and foreclosures, including the so-called "robo-signing" of documents to evict people behind on their mortgages.
In recent days, the state attorneys general agreed to release major banks from claims that they made legal errors when first originating the loans, such as approving loans for borrowers without verifying any income, according to two people familiar with the talks.
In exchange, banks would agree to refinance mortgages for borrowers who are current on their payments but owe more than their homes are currently worth, the sources said.
The deal is being negotiated between the states and several federal agencies on one side, and Bank of America Corp , JPMorgan Chase & Co , Wells Fargo , Citigroup , and Ally Financial on the other.
It also could bolster the Obama administration's plan to further extend help to underwater borrowers whose loans are owned by Fannie Mae or Freddie Mac to refinance their mortgages.
Treasury Secretary Timothy Geithner said on Tuesday that he hopes the government will reveal the details of that plan in coming days.
The deal with the states, which would address bank-owned underwater mortgages, could complement the administration's plan.
Representatives of Citigroup, JPMorgan and Ally declined to comment. Bank of America Chief Financial Officer Bruce Thompson said on an earnings call on Tuesday that there continues to be a lot of settlement discussions but they did not have much new to report. Wells Fargo CEO John Stumpf on Monday declined to comment on the talks.
MILLIONS OF UNDERWATER MORTGAGES
The refinancing plan under consideration by the banks would be in addition to the outlines of the deal agreed to date, pushing the total settlement tab closer to $25 billion from a previous estimate of about $20 billion.
About 70 or 80 percent of that previous amount had been slated to settle federal claims and would be used by the banks to help troubled borrowers with a menu of options to include principal writedowns, cash for transition to rental housing and other forms of assistance.
It is unclear exactly how many homeowners could qualify for refinancing under the new element of the proposed deal.
Around 20 percent of all mortgages are bank-owned. Those loans which are underwater are generally not currently eligible for refinancing.
An estimated 22.5 percent of all residential properties with a mortgage -- around 10.9 million of them -- are underwater, according to data from CoreLogic.
The success of the talks, which hit the one-year mark earlier this month, has been in question in recent months.
California Attorney General Kamala Harris said last month the settlement would provide too little relief for her state's homeowners.
A refinancing plan could lure California, which has some 2 million residents who owe more on their mortgage than their home is worth, back to the table.