Will States Use Foreclosure Money for Other Purposes?

Even before state attorneys general put the final touches on a $25 billion settlement with five major banks over improper mortgage practices on Thursday (February 9), Missouri Governor Jay Nixon announced that he wanted to use some of his state's proceeds for an unexpected purpose: to help fund higher education.

Colleges and universities in Missouri have gone through several rounds of painful budget cuts in recent years, and Nixon, a Democrat, proposed using $40 million from the state's share of the settlement to help offset the 12.5 percent cut to higher education that he initially proposed in his budget this year, The Kansas City Star reported . Republicans who control the state legislature expressed support for the plan, with the chair of a key budget committee saying he was "glad the governor is finally starting to listen to legislators and the people of this state who make education a priority."

But while Nixon and Missouri lawmakers may agree on the need to put mortgage settlement dollars into higher education, the decision actually belongs to Attorney General Chris Koster, who signed onto the agreement with the banks and who, under the terms of the deal, has significant leeway to determine how Missouri's share of the money will be spent. Koster, a Democrat, told reporters on Thursday that he agrees with the governor's call for more higher education funding and will transfer the $40 million Nixon has requested into the general fund, citing the "severe budget shortages" the state faces.

The budget discussion in Missouri is emblematic of what may happen in other states now that the long-awaited bank settlement is a reality. While the vast majority of the $25 billion will go to distressed homeowners in the form of restitution, refinancing, loan forgiveness and other assistance — as housing advocates have demanded — as much as $2.6 billion can be used by the states for a variety of purposes, including some that have nothing to do with housing, Iowa Attorney General Tom Miller acknowledged during a conference call with reporters on Thursday.

"State attorneys general do have discretion over where those funds are directed," Miller, the states' chief negotiator during more than 16 months of talks with the banks, said in response to a Stateline inquiry. He acknowledged that some states, like Missouri, may choose to direct money to other budget areas, but said he personally would focus on using it to stabilize the struggling housing market. "For me and for a lot of other states," Miller said, "the first priority is the infrastructure to help homeowners in distress."

The agreement reached Thursday is the largest multi-state legal settlement in 14 years, and most of the money it guarantees will flow directly to homeowners, though it is still unclear how exactly that process will work. The $2.6 billion that is earmarked for state treasuries will not be divided evenly; instead, it will benefit the states that have faced the greatest upheaval in their housing markets.