Banks’ foreclosure settlement funds used to offset budget gaps

The U.S. government’s settlement against five big banks was supposed to benefit distressed homeowners, but many states cannot resist diverting the funds to make-up for budget shortfalls, the New York Times reported. When the government reached the estimated $25 billion settlement with banks over mortgage and foreclosure abuses, $2.5 billion was earmarked for states to prevent foreclosures, investigate fraud and alleviate general housing market woes. Now, 15 states have announced that they will be budgeting the money for items other than housing — although 27 states have agreed to use their entire distribution as intended.

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The ambiguity of the federal government’s directives has allowed states to argue that a myriad of unrelated projects would benefit the local housing market. For instance, Georgia plans to use $99 million from the settlement on subsidies designed to bring businesses to the state, claiming “that the best way to prevent foreclosures amongst honest homeowners who have experienced hard times is to create jobs here in our state.”

On Tuesday, Shaun Donovan, federal housing secretary, pressed governors to reconsider. “Other uses fail to capitalize on the opportunities presented by the settlement to bring real, concerted relief to homeowners and the communities in which they live,” Donovan said. But state governments are not backing down and in many capitols the money will almost certainly be spent on non-housing related projects. [NYT]

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