BUSINESS
10/18/2012 04:18 pm ET | Updated Oct 25, 2012

Mortgage Settlement: Half Of Money Siphoned Off By Cash-Hungry States

After a bruising year-long battle with banks that resulted in a $25 billion mortgage settlement, the state attorneys general who led the negotiations could be excused for thinking the hard part was over.

But in the months after that deal was reached, many found themselves confronted by a new challenge: fighting with lawmakers who want to siphon off money earmarked for homeowner aid for other uses.

A report released Thursday by Enterprise Community Partners, a housing nonprofit, offers the clearest indication yet that the state attorneys general -- and by extension, struggling homeowners -- are losing the fight against those with sticky fingers. States have diverted more than half of the money allocated for mortgage relief, $988 million so far, to pet projects and other initiatives, according to the report.

A little less than that, $966 million, has gone to housing and other foreclosure-related activities, as intended.

Housing advocates, especially those who counsel families in danger of losing their home to foreclosure, say the decision to reroute settlement dollars for purposes other than homeowner assistance -- even as new financial aid rolls in as part of the deal -- makes no sense.

"We are at a time when the demand for counseling agencies and legal services is at its highest, but unfortunately the capacity to help those who need it is diminished," said Kevin Stein at the California Reinvestment Coalition, a nonprofit that advocates for low-income and minority communities. "A lot of agencies have had to shift funds away from foreclosure prevention because the funds aren't there."

Unlike most spending fights in state houses across the country, this one has not necessarily broken down along traditional party lines.

In South Carolina, the Republican-led state legislature recently voted to override the veto of Republican governor Nikki Haley, who sought to spend the money on housing programs as intended. Instead, about $10 million will go to a fund that incentivizes companies to relocate to South Carolina, while $21 million will go to the state's general fund.

In Georgia, the Republican governor and GOP-led state legislature diverted the entirety of the $99 million allocated under the settlement to an economic development program, even though the Atlanta area has one of the highest foreclosure rates in the country. The Republican Attorney General, Sam Olens, had asked that the money go to homeowner assistance programs.

The most acrimonious showdown happened in California, where Attorney General Kamala Harris lost a battle with Gov. Jerry Brown, a fellow Democrat, over what to do with that state's $400 million share -- the largest received by any state under the settlement.

Harris had said that California would set aside $360 million for housing counseling, legal aid, consumer financial protection investigations and other initiatives meant to mitigate the damage caused by the foreclosure crisis, which hit the state particularly hard.

In May, Brown routed almost all of the money to the general fund, in an effort to help plug California's $15.7 billion budget hole.

In some instances, the problem isn't that the money has been rerouted, it's that it is stuck in limbo while state officials argue about what to do with it.

In Florida, another nexus of the foreclosure crisis, Attorney General Pam Bondi, a Republican, is in "discussions" with the GOP-led state legislature about how to spend the state's $300 million, according to her spokeswoman. Lawmakers have said they should help decide how the money is spent, though they haven't explicitly said they want to divert the money to other programs.

Bondi has said she wants the funds to go to homeowner counseling and other housing programs. Because the money came from a legal settlement, Bondi has taken the position that she does not need legislative approval to spend the money as she sees fit, her spokeswoman said.

It's not all bad news for homeowners. Twenty-three states are using all or substantially all of their funds for housing, according to the report.

One of those states is Ohio, where Mike DeWine, a Republican, is attorney general. Under his direction, 80 percent of his state's share, or $75 million, has gone to fund a new program that pays to tear down abandoned and decaying homes in communities particularly hard-hit by the crisis.

Some critics have argued that the program is not the best use of the money, saying the funds should instead be spread around to housing groups that offer counseling and legal services. In an interview, DeWine said that residents in the affected communities have told him they love the program, because it removes blighted homes that have remained empty for years, and in many cases are in an advanced stage of decay.

"Rather than spreading it around to different programs, I wanted to start something that would have the biggest impact," he said.

So how did he navigate around lawmakers who might have wanted to pick his pocket?

DeWine said he acted fast and didn't ask permission. "Most officials didn't know this settlement was coming," he said. "I announced on the day of the settlement how this money would be spent."

Remarkably, he didn't get a single phone call from a lawmaker who thought differently, DeWine said.

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