Should Mortgage Settlement Funds Be Used to Reduce the State Deficit?

Monday, February 13, 2012 at 8:28 PM by
Journal Sentinel and New York Times Both Answer “No”

Until last week, state officials said the 2011-13 budget was balanced, but we learned last Thursday that state tax revenue is now expected to be $273 million below the previous projection. As a result, projected spending is now $143 million above estimated revenue (and that deficit climbs to $208 million if the state aims to restore the $65 million statutory reserve).

The news about the projected deficit broke on the same day as the news that federal and state officials had reached a $26 billion mortgage settlement with the big banks and mortgage companies. Because I read about the new state deficit estimate before learning of the settlement, it came as a big surprise to me, and probably to many others, to find out that the deficit figure would have been even higher if the Governor hadn’t decided that the state will use $25.6 million for deficit relief from the $140 million coming into Wisconsin from the settlement.

An editorial in the Journal Sentinel over the weekend noted how tempting it is to use that funding to reduce the deficit, but it urged the Governor to resist that temptation. I share that sentiment. Although I would love the state to find one or two silver bullets that can eliminate or at least make a dent in the new deficit, the settlement funds should reach the intended parties – the families who have lost homes or are in danger of losing them because of unscrupulous lending and foreclosure practices. As the Journal Sentinel wrote: “With so many families in Milwaukee – and other Wisconsin communities – hurting under the pain of the foreclosure crisis, that money should be distributed to communities around the state for remediation.

According to the Governor’s Feb. 9 press release, Wisconsin’s $140 million share of the settlement will be used as follows:
  • Up to an estimated $60 million in benefits from loan term modifications and other direct relief.
  • Approximately $17.2 million in uniform payments of up to $2,000 for eligible Wisconsin borrowers who lost their home to foreclosure from January 1, 2008, through December 31, 2011, and suffered servicing abuses.
  • Approximately $31.3 million in refinancing benefits for eligible borrowers who are currently making payments but owe more than their home is worth.
  • Payment to the State of approximately $31.6 million that may be used for compensation to the State, future law enforcement efforts, additional relief to borrowers, civil penalties and/or funding of foreclosure relief and mitigation programs.

Although Governor Walker’s press release didn’t make the point clear, the Journal Sentinel reported Friday that Walker plans to use $25.6 million for state fiscal relief from the $31.6 million in the fourth category outlined above.  It’s somewhat surprising that the Governor would make such a proposal, in light of his criticism of similar funding shifts in the past that closed deficits with one-time money, and in view of his opposition to transfers from segregated funds, such as the patients’ compensation fund.  (Although the new settlement dollars won’t necessarily be put into a segregated fund, there are obvious similarities.)

The primary problem with diverting that funding for deficit reduction is that the settlement falls far short of what is needed by struggling homeowners. As a New York Times editorial noted Sunday, “the settlement between the big banks and federal and state officials is a wrist slap compared with the economic damage wrought by the banks in the housing bubble and bust, and the hardships faced by the 4 million homeowners who have lost their homes and 3.3 million more who are in or close to foreclosure. …At best, this round of relief will reach about two million former and current homeowners.

Perhaps the author of that editorial was thinking of Wisconsin, when s/he noted that: “$3.5 billion will go to state and federal governments for what has been described as resources for legal aid and other counseling for borrowers facing foreclosure. Such aid is vitally important, but it appears that the earmarked money also could be used to plug state budget holes, rather than empower homeowners in their fights against the banks. That would be a mistake.”

Jon Peacock

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