States Divert Mortgage Settlement Funds to Cover Shortfalls

Only 27 states out of 49 that received a total of $2.5 billion from the mortgage settlement with the top U.S. lenders have actually used the money to assist homeowners or hard hit communities affected by the foreclosure crisis.
The remaining 15 states have confirmed that they will use all or part of the settlement funds for the intended – but not required – purpose of helping desperate homeowners or preventing foreclosure fraud.
Some of the cash-strapped states are using the settlement allocations to cover festering budget shortfalls.
Even California, one of the hardest hit states of the housing crisis, is proposing to use its $400 million from the banks to pay down the state’s growing debt burden, according to a proposal from Gov. Jerry Brown.
The state-by-state analysis of the $2.5 billion allocation is provided by Enterprise Community Partners, a national organization that promotes affordable and fair housing.
The $2.5 billion is part of the landmark $25 billion settlement reached in February after more than a year of talks between the top lenders – Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial – and federal and state officials.
The deal was reached as a result of accusations by homeowners and authorities of widespread mishandling of foreclosure paperwork or affidavits that were “robo-signed” by the thousands without regard for fact-checking or proper diligence.
Most of the settlement – about $17 billion – is to be paid out to nearly 1 million homeowners in the form of loan modifications, refinancing for underwater borrowers at current historically low loan rates or mortgage principal reductions.
Nearly another 1 million homeowners who lost their homes will receive, on average, a check for $2,000.
The $2.5 billion portion was divided up as direct payments to 49 states and the District of Columbia. The settlement’s guidelines says: “To the extent practical, such funds shall be used for purposed intended to avoid preventable foreclosures, to ameliorate the effects of the foreclosure crisis, to enhance law enforcement efforts to prevent and prosecute financial fraud…”
But the money “is also tempting to state governors and legislators who have been struggling with state budget shortfalls for years,” said the report by Enterprise Community Partners.
The organization said that some states have still not made a decision on how to use the funds.
“Therefore, housing advocates who would like to see the funds used for housing or foreclosure prevention activities must understand the decision-making process and timing in their particular state in order to be impactful,” said the organization’s report.

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