States Using Mortgage Settlement Funds To Close Budget Gaps

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Pile of coins. Information on states using mortgage settlement funds.

Although recent months have revealed many promising signs of housing market recovery, a recent Bloomberg article reveals that we’re not in the clear just yet, as states continue to divert mortgage settlement funds to patch up budget holes.

The good news is that demand for homes and house prices both appear to be on the rise in many markets. However, many problems have been slower to show visible signs of improvement, such as the fact that 12 million borrowers are still “underwater”, i.e. their mortgages cost more than their homes are worth. In an attempt to improve the situation, a $25 billion national mortgage settlement was established, which required five big banks to dish out $2.5 billion to states to help prevent foreclosures. The problem, though, according to a Bloomberg government report, is that many states are using up to $1 billion of that money for things like filling budget gaps and funding public universities, effectively stalling housing recoveries and leaving millions of borrowers without the assistance they need.

Arizona, for example, moved $50 million of its $97.8 million settlement share to the state’s general fund, despite the fact that it continues to have the highest foreclosure rate in the entire country. California and Florida, too, have directed millions into their general funds. Missouri, meanwhile, plans to reinstate funding for state universities by dipping into its $40 million settlement, and Louisiana has used $1 million to cover costs associated with the Chinese drywall litigation. All of this despite mounting negative equities and thousands of struggling homeowners who can’t seem to get their heads above water.

Debt forgiveness, refinancing, and other housing relief measures were some of the other benefits the mortgage settlement offered. “But the direct payments are a critical piece of the agreement ,” explains the Bloomberg article, “and came at a cost: Attoryneys general from 49 states and the District of Columbia released most claims on the banks in exchange for the settlement, meaning there’s no going back to the kitty.”

Moreover, the money can help prevent foreclosures, which sounds good until you consider that deteriorating vacant homes lower the value of neigboring properties, exacerbating the situation. Local finances suffer, too, as a result of lower sales and higher property taxes, the latter of which finances schools and continue to rise much higher than ever before.

While the mortgage settlement is certainly far from being a cure-all, research shows that if states use the money for the types of assistance it was intended for, the results can be tremendously positive. One such intended use is counseling, which a Department of Housing and Urban Development study revealed could help 69 percent of distressed borrowers modify their mortgages, and 84 percent of those to stay in their homes. As the Bloomberg article concludes, “Using the money for anything other than housing-related efforts won’t solve the governors’ fiscal shortfalls. It will set back a sector’s recovery and hurt the states’ economies along the way.”

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