By Aruna Viswanatha and Rick Rothacker

WASHINGTON, Feb 21 (Reuters) - Five top U.S. banks are on track to meet their financial obligations to help struggling homeowners under a 2012 federal-state settlement to resolve mortgage abuses, the watchdog overseeing the agreement said on Thursday.

But the watchdog, former North Carolina Banking Commissioner Joe Smith, said the banks still needed to improve their compliance with the servicing standards laid out in the settlement. Complaints about how the banks deal with problem loans are still coming in, he said.

In February 2012, Bank of America Corp, JPMorgan Chase & Co, Citigroup Inc, Wells Fargo & Co and Ally Financial agreed to fund about $20 billion in consumer relief to resolve allegations of bank misconduct in processing foreclosures and servicing home loans.

The majority of that was earmarked to help distressed borrowers stay in their homes.

In a report released on Thursday, Smith said the banks had said they had given $45.8 billion worth of relief to struggling homeowners, but a large portion of that came in the form of short sales, which only partially count toward the companies' obligations under the agreement.

"I'm encouraged by the consumer relief piece of the settlement," Smith said in an interview. "I'm satisfied we've got a good infrastructure set up to monitor the banks going forward on the servicing standards, and I understand there's still work to do on that."

Bank of America said in a statement on Thursday that it was on track to meet its financial obligations by the end of March.

Wells Fargo said it had met almost 75 percent of its consumer relief target and had completed the loan refinancings it had been required to do.

JPMorgan said it expected to fulfill its settlement requirements within the first year or shortly after that.

Shares of JPMorgan were down 1 percent in midday trading, while Bank of America and Citigroup each fell about 2 percent. Wells Fargo was up 1.1 percent.

In praising the settlement at a press conference in Chicago, U.S. Housing and Urban Development Secretary Shaun Donovan cautioned the banks needed to work on improving their servicing processes.

""While we are celebrating real progress today, we also are recognizing that we have to hold the banks' feet to the fire to complete the settlement, to live up to the servicing standards that were put in place," Donovan said.

SPEEDING THE RELIEF

The banks completed $19.5 billion in short sales and $11.6 billion in second lien modifications and extinguishments, the report said.

In a short sale, a bank accepts less than the total amount a borrower owes on a mortgage in order to avoid foreclosing on the property.

Short sales are generally seen as more favorable to homeowners than foreclosures. They also usually cost the bank less, and critics have asked whether the banks would offer the short sales regardless of the settlement.

"We felt increasing short sales was a goal of this settlement. We've achieved that. But we also felt it wasn't as important as getting principal reductions," Donovan said at the press conference.

Under the agreement, the banks only receive credit for 45 cents of every dollar of a writedown through a short sale and need 30 percent of their credit to come in modifications of first loans.

Slightly more than 320,000 borrowers received some type of assistance that helped them keep their homes, including a loan modification or refinancing help, which totaled about $24.7 billion, or $76,500 per borrower, the report said.

The banks appear to have made some progress in reducing mortgage balances for borrowers in financial trouble, one of the goals of the settlement. They forgave $7.4 billion in first loan principal for about 70,000 borrowers, the report said, with an average of $105,000 shaved off for each borrower.

"We have already surpassed our initial expectations," Donovan, who helped negotiate the settlement, said in a statement.

Under the settlement, banks were also encouraged to meet their obligations within the first year, to speed relief to the struggling housing sector.

Last week, monitor Smith said Ally had satisfied its requirement to provide $200 million in modifications and other consumer relief under the settlement.

The lender and its subsidiaries were credited with giving $257.4 million in assistance, more than required, but they must still solicit borrowers for the program and provide help if they request it.

In the report, Smith said other banks had also asked him this week to certify that they had met their obligations, but he did not name the companies.

He also said he had received more than 5,700 complaints since last May from consumers whose loans are serviced by the five banks. Most of those complaints stemmed from problems in the loan modification process or with customer service.

Smith said he expected to provide information about the banks' compliance with the servicing standards in a report due this spring.

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