A few other states were still on the fence as of late Wednesday, the person said.

With those two big states, the deal could be worth as much as $26 billion when it is announced Thursday, another person familiar with the talks said.

For more than a year, state attorneys general, regulators, federal officials and big banks have been in talks about a settlement of allegations of improper foreclosures based on "robosigning," seizures made without proper paperwork.

As of Wednesday night, at least 42 had signed on, which would yield as much as $26 billion available for qualified homeowners. The deal marks the largest housing relief available "underwater" homeowners whose principal exceeds their home's value, as well as those who have been foreclosed on, since the financial crisis began.

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Under an earlier draft of the deal, some 1 million U.S. homeowners who are underwater on their mortgages could be eligible for as much as $20,000 in relief of principal owed, according to Secretary of Housing and Urban Development Shaun Donovan.

But the relief would only be available to those homeowners whose mortgages haven't been sold to the government-sponsored mortgage guarantors Fannie Mae and Freddie Mac.

In return, mortgage servicers in states that agree to the deal would get immunity from future state servicing and originating claims -- although homeowners could pursue claims against banks and states could still pursue criminal investigations.

New York's participation had been shaky this week, because some of the banks involved in the multi-state deal had also been sued by Attorney General Eric Schneiderman last week. Those banks -- Bank of America (BAC, Fortune 500), Wells Fargo (WFC, Fortune 500), JPMorgan Chase (JPM, Fortune 500) -- had also asked for a legal pass from Schneiderman's lawsuit, which accuses them of deceptive foreclosure practices for relying on the Mortgage Electronic Registration System.

On Tuesday, Schneiderman's office organized a media briefing to talk about the deal and then canceled it minutes before it was supposed to begin.

Requests for comment to the New York Attorney General's Office were not returned. A spokesman from the California Attorney General's Office said the state was still in negotiations.

The deal is supposed to protect consumers when it comes to robosigning, and ensure that mortgage servicers agree to communicate better, avoid delays and give homeowners who are late on mortgage payments a fairer shake.

The big question throughout the negotiations was how much money would be available to help homeowners, which depended on how many states agreed to the deal. If all 50 states sign on, the mortgage servicing settlement has the potential to offer as much as $26 billion. California's participation raises the total settlement value by several billion dollars.

Generally, the attorneys general have been concerned that if they signed on to a deal, it would cripple their own investigations into mortgage cases.

At least one consumer advocacy group, the Center for Responsible Lending, has said the deal -- while "no silver bullet" -- leaves room to hold banks accountable in other mortgage probes, said Kathleen Day, a spokeswoman for the nonprofit.

The negotiations are between federal agencies, including the U.S. Department of Justice and the U.S. Department of Housing and Urban Development, as well as the state attorneys general and the five largest mortgage servicers:Bank of America, Wells Fargo, JPMorgan Chase, Citigroup (C, Fortune 500) and Ally Financial. A few other regional banks that service mortgages are reportedly considering signing on as well.

And left-leaning groups, including Move On and the New Bottom Line, are continuing to urge states to hold out for a big criminal investigation and a $300 billion settlement award.

--CNN's Jessica Yellin contributed to this story.