We now have yet another state diverting a large portion of the hard dollar funds they received from the foreclosure fraud settlement, and instead of using them to help homeowners, moving them to cover a budget hole. The latest example concerns Arizona, one of the major states suffering from the foreclosure crisis, with an overwhelming number of families that could use the help. Via Pat Garofalo, the state legislature, Attorney General Thomas Horne and Governor Jan Brewer will raid the foreclosure fraud settlement funds to pay for the budget.

The attorney for a public-interest group is asking state Attorney General Tom Horne to not hand over $50 million from a national mortgage-settlement fund to the state budget.

Horne on Tuesday promptly rebuffed the request from the Arizona Center for Law in the Public Interest. This sets the stage for a legal battle over one of the more controversial provisions of the recently enacted state budget.

At issue is the decision of the Legislature and Gov. Jan Brewer to tap $50 million from the $97.7 million the state received as part of its settlement with five mortgage-lending firms. They said they needed the money from the national mortgage settlement to balance the state budget. Initially, the intent was to use the money for prison construction.

If we had a culture of accountability, using this money for prison construction, to house the bank executives who committed criminal fraud against Arizona homeowners, might make some sense. But we don’t, and so Arizona’s cash raid can be seen for what it is.

The Arizona Housing Alliance estimates that $50 million could “provide 75,000 troubled homeowners with housing counseling and 10,000 homeowners with legal assistance.” That’s just a sampling of the kind of things that could be done with these settlement funds if they were put to their actual purpose.

What’s interesting here is that the Arizona Center for Law in the Public Interest plans to go to court over this, saying that the state does not have the right to divert the money. Sadly, I don’t think it will be successful. Based on my read of the settlement documents, there’s nothing to prevent states from raiding the settlement funds. That’s why so many states have already done it. I was running a count at some point on the various states raiding the settlement money. The last update put the number at $184.35 million in raids. So add $50 million to that, and we’re at $234.35 million. That’s out of $2.75 billion in funds. We’re nearing 10% of all settlement funds going to repair state budget holes rather than helping homeowners, and we’ve only confirmed a relative handful of states.

David Dayen

David Dayen