Journalism in the Public Interest

Billion Dollar Bait & Switch: States Divert Foreclosure Deal Funds

Under the foreclosure settlement with big banks, states got $2.5 billion to help homeowners. But a comprehensive, state-by-state breakdown shows that almost a billion is going to general use.

A foreclosed home stands boarded up on February 9, 2012 in Islip, New York. (Getty Images)

May 24, 2012: This post has been updated to clarify Virginia’s use of its settlement funds.

States have diverted $974 million from this year’s landmark mortgage settlement to pay down budget deficits or fund programs unrelated to the foreclosure crisis, according to a ProPublica analysis. That’s nearly forty percent of the $2.5 billion in penalties paid to the states under the agreement.

The settlement, between five of the country’s biggest banks and an alliance of almost all states and the federal government, resolved allegations that the banks deceived homeowners and broke laws when pursuing foreclosure. One part of the settlement is the cash coming to states; the deal urged states to use that money on programs related to the crisis, but it didn’t require them to.

ProPublica contacted every state that participated in the agreement (and the District of Columbia) to obtain the most comprehensive breakdown yet of how they’ll be spending the funds. You can see the detailed state-by-state results here, along with an interactive map. Many states told us they’ll be finalizing their plans in the coming weeks. We’ll be updating our breakdown as the results come in.

What stands out is that even states slammed by the foreclosure crisis are diverting much or all of their money to the general fund. In California, among the hardest hit states, the governor has proposed using all the money to plug his state’s huge budget gap. And Arizona, also among the worst hit, has diverted about half of its funds to general use. Four other states where a high rate of homeowners faced foreclosure during the crisis are spending little if any of their settlement funds on homeowner services: Georgia, South Carolina, Wisconsin, and Maine.

Overall, only about $527 million has been earmarked for new homeowner-focused programs, but that number will go up. A number of large states — in particular New York, Nevada, Illinois, and Florida — have indicated they’ll be dedicating substantial amounts of the funds to consumer programs, but haven’t yet produced a final breakdown.

Iowa Attorney General Tom Miller, who led the coalition of attorneys general who negotiated the deal, argued that only a very small portion of the settlement was being diverted and it will “overwhelmingly” benefit homeowners. The centerpiece of the settlement is a requirement that the banks earn $20 billion in “credits” by helping homeowners in various ways — from reducing principal on underwater homes to bulldozing empty ones. Because the system awards only partial credit for certain actions, Miller said the settlement would bring more than $20 billion in benefits to consumers — he estimated $35 billion. Critics contend those sorts of numbers far overstate the benefits to consumers, because the banks can claim credit for some activities that were already routine.

The banks will only pay $5 billion in actual cash penalties under the agreement. The largest chunk, $2.5 billion, goes to the states’ attorneys general, while about $1 billion goes to the federal government. $1.5 billion will be sent to borrowers who lost their homes to foreclosure during the crisis in the form of $2,000 payments.

Compared with the billions going to consumers, Miller contended, $1 billion going to states’ general funds was minimal. It was always expected that the states would divert some of the money to their general expenditures, he said.

But when announcing the deal, state and federal officials said the states’ $2.5 billion would mainly fund housing counselors and legal aid organizations. Studies have shown homeowners stand a better chance of avoiding foreclosure if they get the help of a counselor, and homeowners lack legal representation in the overwhelming majority of foreclosure cases. The money was divvied up among the states according to a formula that took into account how large the states were and how hard they were hit by the crisis.

As you can see from our breakdown, 15 states have so far allocated over half their amounts to consumer-focused efforts. But the uses range widely. In Ohio, $75 million has been set aside to destroy some 100,000 abandoned homes. In Minnesota, the state is setting up a fund to compensate victims of the banks’ foreclosure abuses.

In two of the states most affected by the foreclosure crisis, California and Arizona, the attorneys general had intended to use most of their funds on homeowner-related efforts before the governors intervened.

After California Attorney General Kamala Harris prepared a proposal to spend the money on counselors, lawyers, and other consumer-related efforts, Gov. Jerry Brown released a proposed revised budget last week that used the state’s $411 million for existing housing programs. In other words, the money would just be used to help fill the state’s $16 billion budget deficit. Harris opposes the move, which still must make its way through the state legislature for it to become law.

The $25 billion settlement: Breaking it down

    $20 billion in credits:
  • $10 billion for cutting debt for struggling, underwater homeowners
  • $7 billion for various other forms of homeowner relief
  • $3 billion for refinancings for underwater homeowners
    • $5 billion in cash payments:
  • $2.5 billion to the states’ attorneys general
  • $1.5 billion to borrowers who lost homes to foreclosure
  • $912 million to the federal government
  • $90 million to various state organizations
  • In Arizona, the attorney general had similar plans. Then state lawmakers and the governor took $50 million of the $98 million coming the state’s way. Although the budget legislation stated that the money should be used to fund departments related to housing and law enforcement, there will be no new spending. Housing advocates are readying a lawsuit to stop the transfer and expect to file in the coming month, said Valerie Iverson, Executive Director of Arizona Housing Alliance.

    Several other large states have diverted most or all of the money:

    • Georgia directed all of its $99 million to programs designed to attract new businesses. A spokesman for the governor said, “He believes that the best way to prevent foreclosures amongst honest homeowners who have experienced hard times is to create jobs here in our state.”

    • In Missouri, the state legislature used almost all of its $39 million to fund higher education, which had been slated for cuts. The attorney general’s office kept $1 million for hotlines and outreach related to the settlement.

    • Virginia put the entirety of its $66.5 million into the state’s general fund without restrictions. In March, Democrats proposed a budget amendment that would funnel all of the money to foreclosure prevention and homeownership programs, but it was voted down. $7 million was ultimately allocated to a state fund for housing programs. While the appropriation was not explicitly tied to the settlement in the final budget, lawmakers involved in the negotiation said that the funding was as a result of the settlement.

    • Wisconsin Governor Scott Walker announced soon after the settlement was finalized that the bulk of it—roughly $26 million—would go into the state general fund. Two million went to an economic development fund, including funds for demolition in blighted neighborhoods. Many state Democrats and housing advocates opposed the plan, but failed to block it.

    • Texas directed its $135 million to the state’s general fund, of which $10 million has been allocated for basic services to low-income Texans. The legislature won’t formally decide what to do with the rest until next January because it meets only once every two years. John Henneberger, co-director of Texas Housers, an affordable housing group, said that in speaking to legislators, advocates had “received no assurances that this money will be used according to the purposes of the settlement.”

    ProPublica will continue to track how the funds are being used in the coming months. Check out our breakdown and interactive map for updates.

    Ronald Fischman

    May 22, 2012, 1:20 p.m.

    It didn;t surprise me to see Scott Walker steal the money But California! This is why the US has to assure a free press!!

    I agree with Ron F - this isn’t surprising.  It’s a repeat of the Big Tobacco settlement a few years ago.  State’s Attorneys General have become sources of revenue instead of guardians of justice.

    Gov & banks have sold out the population for ever according this history book


    May 22, 2012, 11:42 p.m.

    Doesn’t surprise me, Texas is nothing but corruption, its a massive theft ring in Austin, from the governor on down.

    Let me help the “Undetermined” states with further instructions. No, you don’t need to launder it. Yes, the public will eventually forget that it exists. Capiche?

    Going thru a painful foreclosure myself, it doesn’t warm my heart to know Scott Walker is spending money knocking down abandoned, probably foreclosed on houses . Would u rather my family lived in a cardboard box?

    This makes complete sense. The institutions that are supposed to stop wrongdoing have decided to take a cut of the gains instead. They act like a mafia boss. They have every incentive to keep fraudulent activity in the financial sector going (look at all the SEC settlements).

    I’m a 24 year USAR/FLARNG Veteran. Both my brother and father were veterans, Navy Diver and WWII and Korea USMC veterans respectively. My brother, a fallen soldier, now lays in Arlington Cemetery.  We all risked and/or sacrificed our life for our fellow Americans, including both mortgage bankers and seriously injured families that now own homes worth 40% +/- less than the balance of their mortgages as a direct result of the mortgage bankers’ lack of reasonable fiduciary care in originating and selling mortgages during the period from 2004 - 2007 +/-...compounded by these same bankers’ lack of initiative in holding thenselves “Accountable” by accepting 50% of the responsibility and modifying every mortgage they originated on HOMESTEAD PROPERTY ONLY to current LTV’s of no more than 80% AND total monthly debt ratios of no more than 38%...with 50% of any loan balance above this criteria placed on an interest only monthly demand note, that is assumable by a qualified buyer, or when the market value of the home appreciates and the home can bs sold to break even.  After 2 years of payments as agreed under this true and equitable modification, the other 50% of the above defined “underwater loan balance” would be “forgiven” under a legal settlement that prevented the homeowner from having to receive a 1099 form and is exempted from paying Federal Incone Taxes on this other 50% which , after 2 years of performance by the homeowner , would becone the responsibity of the banker.  This process of being “Accountable” for obvious unxerwriting negligence should have already been initiated by the mortgage banking industry but, instead, we’re witnessing our fellow Americans, in this case bankers, attempt to bribe the system to keep them from facing this “Accountability”.  This is not the “America” my family has fought and died for and if is not the America that most of us have always voted for in our local and national voting booths. 
    I agree with the phrase used today by an earlier post. “We need our legislators, courts and Attorney Generals to be Guardians of Justice and this most recent so called Settlememt Was Not a settlement for the above HOMESTEAD OWNERS of AMERICA that are still expecting the above described or some other TRUE ACCOUNTABILITY from these Bankers to these seriously injured HOMEOWNERS that are still living in homes worth 40% +/- less than the balance of their average mortgage.

    US is so corrupt and motivated by greed. The Banksters in the last decade or so have received over 17 Trillion dollars with less than 1% interest from the Federal Reserve. So with politics owned by the Bankters, think things are going to get better? When swimming with the sharks you either have to look like a shark, latch on like a pilot fish or get eaten. Taxation without representation… The 99% need to wake up and take back America…

    This publication, ProPublica, is financed by Herb and Marion Sandler.  Two people who belong in jail for their activities related to mortgages. Angie Mozillo paid some tip money and got off. Chuck Schumer, Barney Frank and Chris Dodd are all on the pad. They pass some laws to extort Wall Street.  Wall Street hands over some low level dopes and the public believes justice is served. You are all being played.

    John Corzine should be in cuffs, but as a former Democratic Governor and Senator, who was busy pouring money into the Obama campaign will walk after stealing $1,6B.

    I can’t wait to see Jamie Dimon deign to pat his hapless lackeys in the house and senate on the head.

    Keep in mind we live in two Americas.  One occupied by well-connected parties who can buy government officials like the Fanjols, Warren Buffett et al. and those who are subjected to paying the debt piled up by these crony capitalists.

    I’m sure the people receiving $2,000 for their home being illegally foreclosed on are thrilled to receive such a life changing amount.  That’s not enough enough to rent a new place in many cities.

    The people who caused this, both in the private sector and government, get a pass.  You and me, we’ll be paying for along time.

    Fina Biscotti

    May 25, 2012, 2 a.m.

    “One part of the settlement is the cash coming to states; the deal urged states to use that money on programs related to the crisis, but it didn’t require them to.”

    Part of the planned settlement - devised by the Obama Administration - was for the 50-State Coalition of State Attorney Generals - devised by the Obama Administration - was to not proceed with criminal charges against banks and lending institutions that defrauded people of their properties through illegal foreclosures.

    The New York State Attorney General refused to accommodate this INJUSTICE - and gave notice to the Obama Administration - that he would not participate any further in the 50-State AG Coalition - and WOULD be proceeding with criminal charges.

    That is why not all States participated in the “settlement”.

    Under the radar, no criminal charges for Fraud and Racketeering activities - against banks and lending institutions - 
    but when the propoganda comes from The White House, it is an entirely different story = “everyone will be held accountable” - is ANOTHER Big Fat LIE.

    The “settlements” for the housing injustices - provided to the States - coincidentally - w no strings attached - has a purpose = Slush Fund for Democrats.

    Don’t kid yourselves!


    May 25, 2012, 5:05 p.m.

    In the UK bankers are not held accountable and, despite government bailouts, have foreclosed and persecuted those with shortfalls without mercy. I was really encouraged to hear the settlement in the US was to make things workable for those suffering with underwater mortgages. However, I am now disgusted to hear this rescue package is not reaching those it was supposed to help.
    For me it is too late. I have already been railroaded out of my home ( in the UK ) and my financial future. I am now being persecuted by the infamous Bank of Scotland for a massive shortfall which they created and for which I do not have the means to repay. Please share my blogposts to raise awareness of how despicably the bankers have and continue to behave.

    If you were stupid enough to buy a house at a bubble price, why should anyone else be expected to subsidize your greed or stupidity when the bubble burst and your overpriced house falls in value to closer to what it is really worth?
    You begged a bank for the mortgage and now want someone else to pay it?
    The solution to owing more than you can or wish to pay on your overpriced house is foreclosure. Walk away. Too bad—you bought it—your problem. Pay up or get out.
    In most places housing still hasn’t dropped back to a realistic sustainable value—the median priced house can’t cost more than three times an area’s median income. The math doesn’t change—it just is.
    Should renters who didn’t buy in the bubble pay higher fees to banks on their cards and accounts to subsidize the bubble-oblivious?

    Hats off to the authors for fighting for transparency on this funky deal w state AG’s.  I can just picture some state AG’s expression when they hear ProPublica’s on the line and figure they gotta take it…
    Irony is how sternly the states played this deal as meaningful justice for needy homeowners.  That’s important because that justice narrative surely helped coax taxpayers to sleep on the magnitude on what the AG’s were giving up…. the liab waiver on reckless underwriting.
    Plus the total $2.5bn figure feels inconsequential from the get-go if you consider that $500bn + in “neg equity” sits in US housing today.  Baffling

    @Tim Denham-Sir, my deepest condolensces concerning your brother. It has to be unfathomable to understand your concern for what is now happening in our beloved country. Please know that I for one am grateful for people and families such as yours.
    @Curmy-Your indifference and callousness is only half of your ignorance of the true situation. I hope your world stays comfortable…free from life altering events of illness, injury and resulting loss of employment. That you never have to make the choice between making a mortgage payment or feeding your children. Or the choice a man recently made after being misled into believing Wells Fargo would do what they said. Unfortunately he chose to put a gun to his head to end the misery. He wasn’t even behind or ever late with a payment upon initially asking for this “help”. Just another “stupid” homeowner eh?


    May 30, 2012, 3:12 a.m.

    It seems all we can expect is more of the same unless we relocate to Iceland

    The government strong arms the banks and then misappropriated the money?  Only a simpleton would be surprised. One thought for those who are in foreclosure. If you pay the money you owe on your contract with the bank, they won’t take your house.

    @Grainofsalt-I’m sorry to iform you but it’s not always that easy. I’m not in foreclosure, but I’ve been asking BoA for almost 2 years to provide ownership of my note (who I’m actually paying) and I’ve never refinanced or borrowed against my home. Yet it has passed to 4 different entities in 5 years. I had an A loan as I put 20% dwn and over 20k in upgrades upon purchase. One year after purchase I had workplace accident and tore up shoulder…made to work another year and seven months due to insurance carrier claiming preexisting condition…eventual shoulder replacement surgery, all the while trying to deal with BoA to modify via HAMP. No request for principle reduction just change of interest for 5 year period before setting to current rate. Told over and over that they couldn’t help until I had missed 60 days, that I did not display a hardship or imminent default. After 2 months missed they provided trial payment of around $130.00 less-my electric rates have risen that much in the past 3 years and it in no way followed HAMP guidelines, but I paid required 4 months since they said proper mod would be forthcoming with permanent. It came and was $7 different. BoA never put any of those payments towards my loan…put over $1000 in escrow for property taxes which I pay $400 a year. Did I mention how they ruined my credit by false reporting to credit bureaus a year earlier (opened case with OCC and took over a year to get them to take away false reporting). Meanwhile without my having taken on any new debt and paying all on time they have managed to take FICO score from 780’s to 660’s. Now with their unwillingness or inability to confirm exactly where and to whom owns my loan I have hired a lawyer and my payments will go in escrow account I have set up. I am facing another surgery on shoulder and at least 3 years of school ( Drs.‘s will not allow me to return to my former line of work-I’ve been found permanently disabled…and no you will not be supporting my disability in any way shape or form and I hope I keep my good neighbors property values from going down if BoA decides to make mistake of foreclosing as I’m going to fight all the way as I have been in this situation for over 2 years now due to BoA’s incompetence and outright lies). I am responsible as I paid $2-300 more every month towards principle when able to work and I’m continuing to pay my $310 HOA fees that some 20% of my neighbors are either unwilling or unable to pay. Call me a deadbeat if you wish…stupid…simpleton…all would be wrong. I’m just an honest man trying to do the right thing, dealing with a company hell bent on doing nothing but line their pockets doing whatever it might take (lying, perjury and fraud are just a few examples). I pray that after you finish “paying the money you owe on your contract” that you will truly be able to show and prove you are rightful owner of your home. If you are dealing with BoA…I wish you much luck with that endeavor.


    June 3, 2012, 4:20 p.m.

    I was shocked to read follow up comments from Grainofsalt and Curmy stating people in foreclosure should make their payments and not buy in a market bubble. I think this stance is a consequence of a belief that foreclosure happens to other people and couldn’t happen to them. I wonder how long it will be before those who believe it is the individual who is deserving of the bankers behaviour find themselves on the receiving end of some of it in this ongoing global banking crisis. I too was desperate to make an arrangement to make my mortgage payments in full when my husband had a breakdown but the bank refused to allow me to tenant my house and instead foreclosed creating a massive shortfall not because I bought in a bubble but because they over valued it in the first place. The over valuation, which I can prove, made it impossible to sell when my husband was facing a unemployment following the demise of his property development company when his business bank went into administration and funding for an ongoing projected of several proprties dried up… A cataogue of events for which the banks were directly responsible for in the first place. I hasten to add the comments in the UK on the subject are not dissimilar. My heart goes out to Roy Stivers who like me has tried to take the right and honourable route but is up against incompetence greed and sharp practice. Without the support of the public in general the banks will enjoy licence to misbehaviour for longer

    @lifeafterdebt-Although I had some idea of how bad the situation was in Europe, I really had no clue until perusing your blogspot.Having spent considerable time in the early 80’s as guest of people from England (Gloucestire-Chaltenam-Cony Hill) while playing rugby, I can say with certainty that they are the most considerate and welcoming of cousins. They gave with their hearts and I am very saddened by the fact they are in the same dire straights as ourselves. Created by the same financial elite only by other names. I applaud your effort there with your very informative blog and I will be following with anticipation of further knowledge.

    @lifeafterdebt. My comment was very brief, I’m not sure how you managed to misunderstand.  I didn’t say a word about buying in a bubble, I simply stated that those consumers signed a contract and should be bound to honor it. When you purchase a home, there is no guarantee of appreciation, most who bought prior to 2008 thought prices could only go up. If there is appreciation in a property the bank does not expect to share in the additional equity. However, under our current government banks are expected to ‘share’ in the loss of equity from the market downturn. No matter what the value of your property is today, if you make your payments for 30 years, as detailed in your contract, the house is yours. Again, regardless of the current value of the home.  Conversely, if you don’t make the payments agreed to, you should lose your home in foreclosure.

    Few if any should be surprised by this article or politician’s behavior. The reason the economy tanked in the first place simply put is lack of honesty and honor. With the demise of these qualities in current societies one should expect more of the same. This is the new status quo, the new business model and the new face of greed.

    This article is part of an ongoing investigation:
    Foreclosure Crisis

    Foreclosure Crisis: Banks and Government Fail Homeowners

    Banks and the government have fallen short in helping homeowners in danger of foreclosure.

    The Story So Far

    Systemic failures at the country’s banks and mortgage servicers have exacerbated the most severe foreclosure crisis since the Great Depression, and government efforts to limit the damage have fallen short. ProPublica created an unrivaled database of homeowners who have faced foreclosure, opened a Facebook page to encourage homeowners to share their stories, wrote profiles of some of them, and incorporated their experiences into our reporting. We also provided a comprehensive rundown of the numbers behind the crisis.

    More »

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