Form validation – replace value of certain fields with suggested valid values

I’m doing some address validation using a webservice in the background.
When the user enters e.g. a street name that’s not quite correct, the backend makes a single suggestion.
I’d like to place the “corrected” street name into the field for street in the form itself and do a form_set_error too, to highlight the field with a message.
The idea is that the user can then accept or overwrite the value.

So much for the use case.

I’ve tried doing this in the validation part as follows:

$form['street']['#parents'] = array('street');
form_set_value($form['street'],t('tjoohooo222'), $form_state);

and also followed this with (also tried without this)

$form_state['rebuild'] = TRUE;

But the form I return to still has the original value in it.
At least – it displays the original value

Dumping form_state I can see the the value for the field is set to the new value, but the “input” value is still the old one.

[input] => >
Array ( [firstname] => ss [street] => myer ...

[values] => >
Array ( [firstname] => ss [street] => tjoohooo222 ...

What am I missing to change the “input” value displayed to the user in the form itself.

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