States using settlement money to plug budgets

Some of the money from the $25 billion settlement with five of the nation’s largest mortgage lenders will never go to help victims of the mortgage crisis. Instead, some of those funds will be channeled directly to state governments to offset their annual budget shortfalls, much in the same way money from the 1998 Tobacco Master Settlement Agreement goes directly into the budget of many states, including Rhode Island.
In the Ocean State, however, it appears that the $172 million allotted as the state’s portion of the settlement will go directly to those who were casualties of poor mortgage practices.
“I have seen a number of states indicate the desire to use the money they are expected to receive to fill budget gaps,” said Amy Kempe, spokesperson for Attorney General Peter Kilmartin. “There has been no such attempt to do so in Rhode Island. Under the terms of the settlement, those monies must be used for homeowner-relief programs and consumer-protection programs. The attorney general will need to submit a plan for Rhode Island’s portion of those funds [$8.9 million]. He has not yet done so.
“We have seen no indication from the governor’s office or the General Assembly that the money will be put toward the general budget,” she added. A spokesman for Gov. Lincoln D. Chafee said he has no plans to try to use any of the money to fill budget gaps.
In Massachusetts, $318 million was awarded, with $46.6 million paid to the state. According to Grant Woodman, spokesperson for Attorney General Martha Coakley, the $46.6 million will be used to assist homeowners.
Of the $172 million, an estimated $152.6 million must be dedicated to principal reduction and loan-term modifications. Borrowers who lost their home to foreclosure from Jan. 1, 2008 through Dec. 31, 2011 and suffered servicing abuse qualify for $3.1 million. Refinanced loans to Rhode Island’s underwater borrowers would receive an estimated $7.3 million, and the state receives a direct payment of $8.9 million to help fund consumer protection and state foreclosure-protection efforts. In New England, Rhode Island ranks third in the amount received, but overall, the state’s piece of the pie is small, where five states exceeded $1 billion.
Although the settlement is for $25 billion the actual value will be closer to $40 billion because the banks’ compensations, including principal reduction, have a financial value in addition to the cash contributed to the settlement. California and Florida, the two largest states affected will receive $18 billion and $8.4 billion respectively, using those calculations.
According to the U.S. Attorney General’s Office, the states each receive a direct payment. “The funds may be distributed by the attorneys general to foreclosure relief and housing programs, including housing counseling, legal assistance, foreclosure-prevention hotlines, foreclosure mediation, and community-blight remediation. A portion of the funds may also be designated as civil penalties for the banks robo-signing misconduct.” Some states are considering the entire portion a civil penalty, enabling them to use the funds to mend budget shortfalls.
Only one month after the settlement, in Pennsylvania, which received $266 million in total funds, state representatives have asked the attorney general’s office to use some of its $69 million payment for civil penalties to offset $2 billion in program cuts. The same can be said for Missouri. Upon receiving almost $197 million, Gov. Jay Nixon has already announced its $41 million penalty will be used to fix the state’s budget. Vermont plans to use $2.4 million from its $6.7 total settlement to help balance its budget. Wisconsin Gov. Scott Walker has proposed taking $25.6 million from its $140 million to help cover the state’s budget. Maryland received $960 million in total payments, and Attorney General Doug Gansler has said about 10 percent of the state’s $62.5 million share will be available for the governor and legislators to spend.
California received $430 million dedicated to the state. As of yet, no decision has been made on how it will be spent.
On the other side of the spectrum, Illinois Attorney General Lisa Madigan has said she will oppose any efforts to use the money to supplement the state’s budget. Ohio’s $335 million includes $97 million for the state, $75 million of which the attorney general’s office will use to demolish abandoned properties. The money will be distributed in matching grants to communities.
On Feb. 9, U.S. Attorney General Eric Holder announced the settlement in which five of the nation’s largest mortgage lenders were sued for alleged mortgage-loan servicing and foreclosure abuses. The suit represented the interests of the federal government and 49 states, Oklahoma being the only holdout. The settlement is the largest single payment of its kind.
The banks included in the settlement are Bank of America Corporation, JPMorgan Chase & Co., Wells Fargo & Company, Citigroup Inc. and Ally Financial Inc., formerly known as GMAC. •

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