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In this Feb. 9, 2012, photo Missouri Attorney General Chris Koster stands in front of a chart in Jefferson City, Mo., showing the proposed distribution of the state's $196,842,222.21 share of a settlement with the nation's top mortgage lenders. Of that amount, $41 would be paid directly to the state government to spend as it chooses and Gov. Jay Nixon plans to use nearly all of it to help shore up the budget. He's not the only politician eyeing the cash for purposes that have nothing to do with foreclosure. (AP Photo/Kelley McCall)
Desperate states diverting foreclosure settlement money
Funding » Some using it to fill critical budget gaps, not to help homeowners.
First Published Feb 25 2012 01:01 am • Last Updated May 24 2012 11:38 pm

The ink wasn’t even dry on a settlement with the nation’s top mortgage lenders when Missouri Gov. Jay Nixon laid claim to a chunk of the money to avert a huge budget cut for public colleges and universities.

He’s not the only politician eyeing the cash for purposes that have nothing to do with foreclosures. Like a pot of gold in a barren field, the $25 billion deal offers a tempting and timely source of funding for state governments with multimillion-dollar budget gaps.

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Although most of the money goes directly to homeowners affected by the mortgage crisis, the settlement announced this month by attorneys general in 49 states includes nearly $2.7 billion for state governments to spend as they wish.

Some are pledging to use it as relief for struggling homeowners or to help related initiatives such as a Michigan plan to assist children left homeless by foreclosures. But several states are already planning to divert at least some of the money to prop up their budgets, and more will be wrestling with those decisions in the coming weeks.

Utah’s portion of the money going directly to state governments was about $23 million. In announcing the settlement two weeks ago, Gov. Gary Herbert said he would recommend to the Legislature that some go to homeowner education and counseling.

The governor is considering sending about $8 million into two funds in the Department of Commerce to assist homeowners and another $2 million to operate a legal clinic for those facing foreclosure, said Juliette Tennert, deputy state budget director.

Some of the rest could go to replenish the state’s Rainy Day Fund, which was drawn down during the economic downturn, she said, adding that precise amounts and where they would go will have to be negotiated with the Legislature.

For some consumer advocates, the diversion is reminiscent of the 1998 tobacco settlement in which states spent billions on projects that had nothing to do with curbing smoking.

"We shouldn’t be in the position of taking money that is intended to help consumers and their mortgage tribulations and putting that to another purpose," said Joan Bray, a former Democratic Missouri senator who now is chairwoman of the Consumers Council of Missouri.

States that use the one-time payout for immediate expenses may also face the question of what to do next year when the money is used up. But officials in struggling states say they must deal with the most immediate problems first.


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A federal judge in Washington could approve the final settlement by the end of February.

Once that happens, money could begin flowing to states within a couple of weeks, arriving just as lawmakers are crafting budgets for the upcoming fiscal year.

Republican legislative leaders in Missouri have already embraced the Democratic governor’s plan to use nearly all of the state’s $41 million settlement payment to help shore up the budget. The mortgage money allowed Nixon to reduce his proposed funding cut for public colleges and universities from 12.5 percent to 7.8 percent — potentially easing student tuition increases.

The money was "as we looked at it, relatively unfettered," Nixon said. "Clearly the economy was affected all across the country by foreclosure challenges, and I think it is apt and appropriate to use those dollars to help restore some of the challenging cuts that I was forced to make."

In Pennsylvania, where a fourth straight budget deficit is projected, Democrats are pressing the Republican-run Attorney General’s Office to use some of its $69 million payment to offset $2 billion in cuts to programs that benefit education, the elderly, disabled or poor.

"The governor’s budget has so many cuts to so many valuable programs, if the Attorney General’s Office has $69 million, why not use that to offset these cuts to essential programs?" said state Rep. Joe Markosek, the ranking Democrat on the House Appropriations Committee.

Vermont plans to use $2.4 million from the settlement to help balance its budget. Maryland Attorney General Doug Gansler said about 10 percent of his state’s $62.5 million payment will be made available for the governor and lawmakers to spend as they choose.

In Wisconsin, Gov. Scott Walker wants to use $26 million to plug a state budget hole because the foreclosure crisis had a "direct impact on the economy." But the Republican governor’s plan has ruffled some Democrats, including Milwaukee Mayor Tom Barrett.

St. Louis homebuilder Bob Suelmann, who has a background in real estate and finance, said it’s "ridiculous" for states to divert mortgage settlement payments to other purposes.

"It’s like taking tax money that was supposed to go to road improvements, and then suddenly the bridges are falling down and you don’t know what to do about it," Suelmann said. "That money should go to something that can directly improve the situation with the housing program."

When the tobacco settlement was reached, states initially promised to beef up public health with the $206 billion paid out over several decades. Instead, much of the money went to general government operations. State funding for tobacco-prevention programs has now fallen to its lowest level since 1999, according to recent estimates.

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