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Some states to use foreclosure settlement money to patch budgets

Seeing a chance to plug budget holes in their states, three governors are laying claim to portions of a recent $25 billion mortgage foreclosure settlement to be paid by five of the nation’s largest banks.

Where authority for use of the money rests is not entirely clear. Some media reports say U.S., Attorney General Eric Holder and the 49 attorneys general who approved the settlement neglected to insert specific language that the direct payments to the states must go to help struggling homeowners. Other reports have it that the attorneys general have significant leeway to determine how their state’s share of the money will be spent, including for purposes unrelated to foreclosure mitigation.

Here’s what the National Mortgage Settlement says about the payments to the states:

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.

Inclusion of the phrase “civil penalties” is being seen as latitude to allocate the money to general fund purposes.

Geoff Greenwood, spokesman for Iowa Attorney General Tom Miller, chair of the AG foreclosure task force, said in most instances how the direct payments are spent will be determined by the statutes of each state. The statutes in most instances will address what entities within state government can set the spending allocations.

“In some states the attorney general is going to have discretion on how the money is spent. In others it will be up to the legislatures.”

Greenwood noted a case for diverting some of the money could be made by governors and legislators who can justifiably claim that the actions of the banks impacted state revenues and created the need for new services. For instance, he said, “I can imagine that education budgets were impacted.”

Regardless of where authority rests, governors and attorneys general in Wisconsin, Maine and Missouri have declared they intend to use the money to offset shortfalls in general revenues.

Mississippi is to get a direct payment of $14.7 million. That could be an enticing sum for new Gov. Phil Bryant as he explores options for balancing state spending amid slumping revenue collections. Bryant’s office did not respond to queries on the issue Thursday. Hood’s spokeswoman Jan Schaefer said the attorney general is reviewing the issue.

“The court has not approved this order so we have time to finish our review,” she said in an email.

Hood indicated last week he expects the leadership in the Mississippi House of Representatives to try to stop him from continuing with securities lawsuits against some of the guilty banks and the ratings agencies that condoned the fraudulent practices. Legislators this session are moving ahead with measures to curb Hood’s use of outside legal resources in litigation against corporations and other entities. Stripping him of the $14.7 million could limit his ability to pursue further litigation against the banks and ratings agencies.

Hood voiced his concerns in a press statement last week:

“Some of the culprits of our economic collapse should go to jail. I will continue with our securities suits against some of these banks and the ratings agencies which condoned these fraudulent securities. These are the very kind of cases our leadership in the Mississippi House of Representatives wants to try and stop me from being able to pursue. They want to strip the Attorney General of power just to make a political statement that sides with corporate wrongdoers and against the best interests of our state.”

Meanwhile, in Wisconsin no conflict will play out between Gov. Scott Walker and Attorney General JB Van Hollen. The two Republicans have decided to use their state’s $141 million to help cover budget shortfalls rather than foreclosure mitigation.

Likewise, no conflict will arise over diverting of the $40 million direct payment to Missouri. The state’s Democratic governor and Attorney General have shook on a deal to allocate the money to budget needs.

Maine’s Attorney General has announced that $5.7 million of the state’s $8.2 million direct payment will go to the general fund.

Money for the settlement is coming from Bank of America, Citi, Wells Fargo, Ally/GMAC and Chase. In the settlement, they acknowledged employees signed off on mortgage foreclosure documents without being certain the banks for which they worked actually owned the mortgages.


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