Mortgage Settlement Windfall May Be Diverted in Some States

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Homeowners who welcomed the recent "robosigning" settlement while thinking that it might offer them some relief on their "underwater" mortgages may see those funds diverted for other purposes in nearly half of the states involved.

The $25 billion settlement over illegal foreclosures that was reached between state attorneys general, federal agencies and the nation's five largest banks was trumpeted as an agreement that would bring significant relief to many of the nation's beleaguered homeowners, who have watched their home equity vanish during the housing downturn.

But while the majority of that money will flow to homeowners in the form of mortgage modifications paid for by banks, some of a $2.5 billion cash penalty allocated to states may not be used for housing relief, The New York Times reports.

Twenty-two of the 49 states that are part of the settlement are exploiting the windfall to use at least some of the money to mend soft spots in their economies and budgets, a report by the Enterprise Community Partners suggests. In Georgia, for example, the state will use its $99 million to draw business to the state, while in California, Gov. Jerry Brown has proposed using most of the money to pay down the state's debt, The New York Times says.

Mark Calabria, director of Financial Regulation Studies at the Cato Institute, a conservative think tank, says the possibility of states using the funds for purposes other than housing relief "was absolutely predictable," since "no strings were attached" to the settlement. He compares the mortgage deal to the historic 1998 tobacco settlement.

All the money of that settlement, he says, "was promised money to go to health care" but "the states just did whatever they wanted." In the case of the foreclosure settlement, he points out that just 6 percent of the penalty on banks is reserved for compensating homeowners who lost their homes to foreclosure.

"This reinforces in my mind that this was just a shakedown [of the banks] by the states without actually guaranteeing that anyone who was harmed would actually be compensated," he says.

In most states, attorneys general exercise full control over their state's allocation, making it likelier that they, as former stakeholders in the settlement, will invest their share of the fine in the housing market. But some state constitutions put control of the money in the hands of state legislators and/or governors, the report says.

Though unanticipated use of the funds is sure to draw fire from fair housing advocates, the report notes that most of the money still should percolate down through the real estate market. What's more, the report says that only 10 states have finalized their decisions on how to allocate the money.

That would seem to give Department of Housing and Urban Development Secretary Shaun Donovan time to use his clout to pressure states to invest the money in housing relief, and scrap plans to use it elsewhere.

See also:
Trifecta of Good News Boosts Real Estate Market
Buying a Home Won't Get Much Cheaper
6 Cities Where Rents Are Skyrocketing


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