Some States are Not Using Their Foreclosure Settlement Funds to Help Homeowners

Burke Smith ForeclosureStates recently received $2.5 billion from the major banks for foreclosure prevention and related help for homeowners. But much of that is not being used for those purposes.

A relatively small part of the $25 billion settlement by the federal and state governments against the five major banks announced with big fanfare back in February involved actual money paid by the banks. (Most is in the form of credits the banks get for doing mortgage modifications and such). But one such direct payment is $2.5 billion from the banks straight to the 49 states that had joined in the settlement (all except Oklahoma). So what is supposed to happen to that money?

The answer to that should be found in the Consent Judgment, the document signed by all 49 states, the federal government and the banks, AND by the federal judge approving the settlement. Actually there are five consent judgments, one for each of the banks, but all containing identical language for our purposes. This language says:

“To the extent practicable, such funds shall be used for purposes intended to avoid preventable foreclosures, to ameliorate the effects of the foreclosure crisis, to enhance law enforcement efforts to prevent and prosecute financial fraud, or unfair or deceptive acts or practices and to compensate the States for costs resulting from the alleged unlawful conduct of the Defendants. Such permissible purposes for allocation of the funds include, but are not limited to, supplementing the amounts paid to state homeowners under the Borrower Payment Fund, funding for housing counselors, state and local foreclosure assistance hotlines, state and local foreclosure mediation programs, legal assistance, housing remediation and anti-blight projects, funding for training and staffing of financial fraud or consumer protection enforcement efforts, and civil penalties.”

(See pp. B-2 and B-3 of Exhibit B of the Consent Judgment.)

But the money is not being used for these purposes in many states, according to two different sources.

A report by Enterprise Community Partners called $2.5 Billion: Understanding How States are Spending their Share of the National Mortgage Settlement says that “despite the language contained in the settlement, a number of states have diverted the settlement funds away from housing and foreclosure prevention activities.”

A more recent article by ProPublica, the independent investigative organization, is titled “Billion Dollar Bait & Switch: States Divert Foreclosure Deal Funds.” Its analysis concludes that “[s]tates have diverted $974 million from this year’s landmark mortgage settlement to pay down budget deficits or fund programs unrelated to the foreclosure crisis… That’s nearly forty percent of the $2.5 billion in penalties paid to the states under the agreement.” This interactive map and table shows each state’s use of the funds.