Robo-Signing Settlement Cash Disappears Into State Treasuries

The $25 billion robo-signing settlement announced earlier this year has finally begun to bear fruit — at least for a number of states with budgetary problems.

A new report released by the public-interest journalism site, ProPublica, shows that a total of $25 billion was obtained by attorneys general in 49 states and the District of Columbia (Oklahoma was not part of the settlement). Of the total, most was in the form of credits and modifications for borrowers but $2.5 billion in cash was given to the states and could be used as they wanted. That’s great news — but curious citizens might wonder how such money has been used to resolve the mortgage mess.

According to ProPublica, Ohio used $92.8 million and New Jersey used $72.1 million to assist homeowners. In both cases that’s 100 percent of the cash they received from the settlement.

Other states, however, used the money differently. Texas took all of the $134.6 million it was awarded and put it in the state’s general fund. Georgia did the same with the $99.4 million bounty it received. California got $410.6 million and added all of it to the state general fund.

For all the hoopla and news releases generated from the foreclosure settlement it turns out that a lot of the money spent so far — almost $1 billion of the $2.5 billion cash payout to the states — has actually been used to subsidize state budgets. Meanwhile, as of this writing homeowners have received around $617 million.

Why would states put the money into their general funds? By using the robo-signing cash as a subsidy politicians can avoid tax increases and budget deficits during election years. In other words, state budgets look better.

But at a time when the housing sector remains deeply troubled, subsidizing state treasuries does little good for beleaguered homeowners. The way to build up state budgets is to strengthen state economies. If the marketplace is flooded with short sales, foreclosures, and REO’s then real estate values are not going to rise and discount home prices mean years of smaller tax collections and reduced public services. The better approach is to restore the housing market and the huge number of jobs it creates, a strategy which is good for both Main Street and state treasuries.

To their credit, Ohio, New Jersey, Illinois, Indiana, Minnesota, Arkansas, and New Mexico have used all the settlement cash available for homeowner assistance to — of all things — help homeowners avoid foreclosure. Magically, Colorado and Montana have done even better: according to ProPublica, they have somehow managed to set aside more cash for homeowners than they actually received from the settlement. Other states should follow their example.

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