Bloomberg News

Foreclosure Deal May Help States Prop Up Budgets, Raze Homes

February 14, 2012

(Updates with comment from Texas lawyer in 12th paragraph.)

Feb. 13 (Bloomberg) -- Wisconsin plans to use part of its $140 million share of the national foreclosure settlement to fill a budget hole. Missouri would devote $40 million for education. Ohio wants to tear down vacant homes.

Ninety percent of the $25 billion settlement announced Feb. 9 goes to borrowers, with states receiving at least $2.66 billion, said Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller, who helped negotiate the deal. The money for states is to “help fund consumer protection and state foreclosure-protection efforts,” according to the National Mortgage Settlement website, though states have discretion in spending, and their tax bases and budgets were hurt by the housing crash, Greenwood said in an e-mail.

Most states, especially those hit hard by foreclosures, probably will spend the money on related purposes instead of priorities that the public may not see as fitting the settlement’s spirit, said David Adkins, executive director of the Council of State Governments in Lexington, Kentucky.

“If my home were in foreclosure, I would want to make certain that the revenue in my state was directed at ameliorating that specific problem,”Adkins said.

The deal, struck between 49 states and Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc., ends a probe into abuses stemming from the housing bubble’s collapse. It requires the banks to pay $20 billion to homeowners in mortgage relief and $5 billion to state and federal governments. That includes the $2.66 billion, according to the National Association of Attorneys General.

‘Not One Dime’

Hours after the settlement’s announcement, Wisconsin’s Republican Governor Scott Walker and Attorney General J.B. Van Hollen said that $25.6 million of the state’s $140 million share would be put toward a projected $143 million deficit.

That prompted a protest from Milwaukee Mayor Tom Barrett, a Democrat and Walker’s opponent in the gubernatorial election.

“Not one dime should be used to fund the unbalanced state budget,” he said in a prepared statement. “Families and local communities did not cause the foreclosure crisis, nor did they have a hand in the mismanaged state budget.”

Missouri has similar plans. Democratic Governor Jay Nixon and Attorney General Chris Koster said $40 million of its $155 million settlement would be set aside to lessen cuts to colleges and universities.

Tom Kelley, a spokesman for Texas Attorney General Greg Abbott, said the Legislature will decide how to spend $141 million of its $428 million. Competition is taking shape.

Helping the Poor

“The best use of that money would be to restructure loans,” said Molly Rogers, staff attorney with Austin-based Texas Rio Grande Legal Aid Inc., which assists poor residents in 68 South Texas counties. “A good chunk of this money should go to appropriate organizations who can help borrowers.”

In New York, Attorney General Eric Schneiderman said on MSNBC’s “The Rachel Maddow Show” that most of the state’s settlement money “is going for legal services for housing counseling, so no New Yorker is ever wrongfully evicted because they don’t have a lawyer.”

Financial conditions may change, altering the plans of states. Arturo Perez, director of the fiscal affairs program at the National Conference of State Legislatures, said that in 1998 states were “flush” with money when they negotiated a settlement with cigarette companies that provided $206 billion over 25 years.

While states intended to use the money for health care and anti-smoking programs, “they started looking around and put their eyes on the tobacco settlement money” when the economy softened in 2001, Perez said.

With a Thud

The 18-month recession that began in December 2007 ravaged state budgets. Shortfalls in 2009 through 2012 totaled more than $530 billion nationwide, according to the Center for Budget and Policy Priorities.

Financial conditions have improved “but at a very slow pace,” the Conference of Legislatures said in a Dec. 1 report, adding that “the effects of the Great Recession continue to linger.”

“State revenues fell like a bowling ball and they have bounced back, much like a bowling ball,” Perez said in a telephone interview from Denver.

The deficits and foreclosures have left states and municipalities racing to catch up with years of decay.

Ohio, which is receiving $97 million in its direct payment from last week’s settlement, plans to allocate $75 million to demolish vacant and dilapidated homes dragging down the values of neighboring properties, Attorney General Mike DeWine said Feb. 9.

Destroying the Village

At least 100,000 homes need to be demolished, DeWine said, and he is establishing a program to match funds that cities and land banks allocate for tearing down houses.

Using the settlement money for that purpose is appropriate because many homeowners are paying their mortgages and did nothing wrong, yet they face plummeting property values because of foreclosures around them, said Jim Rokakis, a former Cuyahoga County treasurer who directs Cleveland’s nonprofit Thriving Communities Institute.

“If you don’t take these homes down, these neighborhoods will continue to lose what little value they have left, they will be less safe and there will be zero chance of those neighborhoods coming back,” Rokakis said in a Feb. 9 telephone interview. “You can’t build the new American city until you take the old one down first.”

--With assistance from Michael Bender in New York, Chris Christoff in Lansing, Amanda J. Crawford in Phoenix, Terrence Dopp in Trenton , Freeman Klopott in Albany , David Mildenberg in Austin and Jennifer Oldham in Denver. Editors: Stephen Merelman, Mark Schoifet

To contact the reporters on this story: Mark Niquette in Columbus at mniquette@bloomberg.net; Timothy Jones in Chicago at tjones58@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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