States’ Use of Mortgage Settlement Money a Repeat of Tobacco Settlement Diversion

In these times of state government budget shortfalls, some States are deciding to use their portion of the massive $25 billion national mortgage settlement to make up for budget shortfalls rather than to provide aid to homeowners.

According to a May 15, 2012 report from Enterprise Community Partners, a national affordable housing group, 27 States have devoted all of their proceeds from the national settlement for housing purposes. Approximately 15 States will use all or a portion of the funds for other purposes. The fund allocation decision also varies from State to State; in most, the AG is the sole decision-maker, as well as the direct recipient of those funds. In other States, the decision rests with the legislature or the Governor. In Georgia, Governor Nathan Deal has decided to use the State’s $99 million for economic development in order to attract jobs. Maryland AG Doug Gansler recently announced that Maryland will use most of the approximate $60 million it receives for housing counseling, legal help for homeowners and anti-blight work, and approximately $6 million for the general fund.

The diversion of settlement proceeds for other purposes is similar to the States’ use of the proceeds from the tobacco settlement. A 2007 report from the GAO found that of the $52.6 billion the States received in settlement payments, 30% of the payments went to health care, while 22.9% was used to cover budget shortfalls. Although the tobacco settlement agreement did not impose any restrictions on how States could spend their payments, many critics of the spending believed that the money should have been devoted to smoking prevention and education programs as well as health-related efforts.

Some States’ plans to use the mortgage settlement money for non-housing purposes has concerned government officials including U.S. Department of Housing and Urban Development Secretary Shaun Donovan: “the settlement makes very clear that the intention of this funding is to be used to help homeowners stay in their homes, to help communities recover, and yet we have attorneys general in some States, governors in some States, legislatures, that are trying to divert this funding away from the intended purpose to fill gaps in state budgets.”

In Arizona, for example, on May 1, 2012, the legislature passed a bill ordering the AG to place $50 million of the settlement funds (out of approximately $97 million) into the State’s general fund. On May 24, 2012, a group of homeowners filed suit against AG Tom Horne and Doug Ducey, the Arizona Treasurer, seeking declaratory and injunctive relief to prevent the settlement money from being transferred to the State’s general fund.