Foreclosure Settlement Funds Diverted in Some States

(TheNicheReport) -- When several state attorney generals and the U.S. Justice Department sat down with legal representatives from the leading five mortgage lenders earlier this year, an unprecedented agreement was reached. In lieu of accepting wrongdoing over allegations of questionable foreclosure practices, the banks agreed to pay states $2.5 billion in different foreclosure prevention measures such as mediation, counseling and legal assistance. 

A new report by a non-profit organization dedicated to monitoring the performance of the settlement revealed that some states have used these funds for purposes other than those originally intended. According to the report by Enterprise Community Partners, $989 million have been diverted to cover shortfalls on state budgets. 

Disagreements Over the Use of Funds

Almost $2 billion of the settlement funds have already been earmarked by different states, and a little over half of the funds will be used for general budget expenditures instead of foreclosure prevention and alleviation programs. The $588 million left to allocate will go to Florida and Texas.

Virtually every state in the Union will benefit from the National Mortgage Foreclosure Settlement Agreement, but only 14 states have announced their intentions of using the funds for their original purpose. The states of California and Florida, two of the most affected by the foreclosure crisis that started in 2007, have been the most contentious in this regard. 

In California, a state notorious for its deficit, Governor Jerry Brown ordered $410 million from the settlement to be used for purposes other than helping mortgage borrowers on the brink of foreclosure -a measure that the State Attorney General is opposed to. A similar situation is playing out in Florida, where the Attorney General wants to have the final say on how the funds are used, but legislators do not agree. 

South Carolina received $31 million in settlement funds, but legislators wanted to use the money to stimulate business activity in the state. A veto by the Governor resulted in a compromise of $10 million being diverted. An Arizona consumer group filed a lawsuit against lawmakers who wanted to divert $50 million to prop up the state budget. 

Compliant States 

Some states, like Connecticut, are already using most of the funds received towards foreclosure relief programs. Other states like Ohio and Tennessee are administering the settlement money in the way they are supposed to: Managing programs designed to keep people in their homes.