State siphons off $50 million from foreclosure settlement

A part of the 2013 Arizona budget bill that garnered "make the news" attention was the $50 million swept from the Attorney General's Mortgage Settlement Fund. Arizona was part of a multi-state and federal settlement against several banks that used suspect practices (e.g. robo-signing) when carrying out foreclosures.

The settlement was huge, up to $25 billion, and most of it will be administered nationwide to provide refinancing relief to struggling homeowners. Most states received a cut of the settlement "to help fund consumer protection and state foreclosure protection efforts." Arizona's portion was about $97 million. 

The budget bill takes over half of the settlement, $50 million, and diverts it to the General Fund. Many are unhappy about this decision. A statewide housing advocacy group, Arizona Housing Alliance, is threatening to sue the state, saying that the settlement is explicit in the activities that should be funded. Meanwhile, some legislators say that the bust in the housing market hurt state coffers for the past several years. Others justify the sweep by suggesting the settlement amounts to a "pricey outreach and education fund."

If used appropriately, this funding could be an investment in strengthening Arizona's consumer protection and education infrastructure, and not just a "pricey outreach" boondoggle by state government.

Housing counseling and educational workshops – both the type that help prepare families to be homeowners and the kind that happens when a family finds itself at the doorsteps of foreclosure – are frequently sponsored by local nonprofit organizations. Some of these nonprofits are well-known and trusted Arizona institutions, including Chicanos Por La Causa and Catholic Community Services of Southern Arizona.

Anecdotally, these organizations are overwhelmed by the need for foreclosure counseling services, and underwhelmed by the funding available.  According to a study by the Center on Responsible Lending,  all of Arizona – its rural areas as well its metros – is among the markets in most need of foreclosure counseling in the entire country.

Most of the cost of foreclosure counseling is in personnel. Families who use these services are not billed, and nonprofit organizations must find other sources of funding. Arizona's mortgage settlement fund would be an ideal source. The Minneapolis Federal Reserve calculated that one foreclosure counselor can help around 192 families in just one year. Rolling in other expenses, it costs around $400 per family to provide foreclosure counseling.

Now that we have several years of the foreclosure crisis under our belt, we know that this type of intervention works. The National Foreclosure Mitigation Counseling Program funds organizations that provide foreclosure counseling; over 335,000 families since the start of the housing crisis. An Urban Institute evaluation of this program provides some valuable insight to what is possible with the full $97 million settlement.

 For those families that received foreclosure counseling and no loan modification or refinance, the likelihood of re-default or foreclosure by about half. For those families that received counseling and a modified loan, their loans were $176 a month less than non-counseled clients who also received loan modifications. This produced an annual savings of $2,100 for each counseled homeowner. Moreover, each foreclosure prevented by this program saved an estimated $70,600 in avoided costs to homeowners, lenders and local governments.

With the mortgage settlement fund we have an opportunity to help struggling homeowners, strengthen nonprofit organizations and help avoid costs to many parties. The Center Responsible Lending has shown a need for foreclosure counseling throughout Arizona. The Urban Institute has shown it works in reducing foreclosures and saving many people and organizations money. Instead, we've chosen the general fund abyss.