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Using Foreclosure Settlement Funds for Effective Mortgage Dispute Resolution

Just Court ADR, May 21st, 2012

The settlement was huge. Five major banks signed an agreement with 49 Attorneys General after the AGs instigated an investigation into the foreclosure crisis and the banks’ involvement in it. The result: an unprecedented $25 billion is flowing into states over the next three years to repair the damage the foreclosure crisis has caused to infrastructure, lending and homes. The settlement agreement earmarks $2.66 billion of this money for foreclosure prevention efforts, which could include increased housing counseling availability and more robust dispute resolution programs.

So where is the money going?

Some states are using the money to fill funding gaps in services related to the foreclosure crisis: affordable housing (FL), vacant building demolition (OH), low-income family energy assistance (IN), and services for kids displaced by foreclosure (MI).

But, many states—Wisconsin, Missouri, Arizona, California, Texas, Maine—have chosen to take over half of their portion of the $2.66 billion earmarked money and apply it to general fund budget deficits. They are using the money to pay for things like state college and university salaries (MO), public education (PA), and pay raises for state employees (VA). In some cases, they are not specifying how they will use the money, other than to balance the state budget (VT) or give the legislature some discretionary spending (MD). The argument from these states is that the foreclosure crisis has already caused gaps in the general state budget, so it’s only fair to let the banks pay to refill these gaps. But this hurts the prospects of dispute resolution programs being funded to help resolve the current mortgage crisis.

Twenty-seven states are resisting the urge to divert this money away from foreclosure prevention. State representatives in Wisconsin introduced a bill to prevent Governor Walker from diverting funds from the settlement for general purposes. In Illinois, Attorney General Lisa Madigan says she opposes any efforts to distribute the money any way but for foreclosure prevention, despite Illinois’ significant budget crisis. Still, as of this date, only four of the 27 states that are using the earmarked funds for foreclosure prevention—Arizona, Florida, Washington, Wyoming—have said they will use the funds for foreclosure mediation programs.

Perhaps foreclosure dispute resolution programs, and those who support them as a worthwhile process to resolve foreclosure disputes, need to make a greater showing about how dispute resolution can improve states’ recoveries. By being clear about a program’s goals and regularly reporting on whether those goals are being met, foreclosure dispute resolution programs can demonstrate their ability to foster communication and understanding in the midst of community crisis.

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