Last week, we discussed the $26 billion settlement between the government and large, big-bank mortgage lenders. While a large portion of this amount is going directly to homeowners hit by the foreclosure crisis, $2.7 billion has been directed to 49 state governments, but no provisions for allotment, distribution, or usage are in place. As a result, the Huffington Post points out, states are putting their amounts toward closing budget gaps.

Do you think is a flagrant misuse of funds? Not all states think so. In fact, several see the foreclosure crisis as a widespread and painful hit to the local economy, and in response, putting the settlement’s funds toward the state budget makes sense. Missouri is one such state, and the foreclosure settlement funds are being set aside for colleges and universities. Gov. Jay Nixon told the press:

“Clearly the economy was affected all across the country by foreclosure challenges, and I think it is apt and appropriate to use those dollars to help restore some of the challenging cuts that I was forced to make.”

On the other hand, citizens think such usage is illogical and, perhaps even, harmful. In response to Missouri’s allocation use, a St. Louis homebuilder stated to the press:

“It’s like taking tax money that was supposed to go to road improvements, and then suddenly the bridges are falling down and you don’t know what to do about it. That money should go to something that can directly improve the situation with the housing program.”

Who do you agree with? States intending to devote the funds toward foreclosure-related needs are putting them toward mortgage assistance hotlines, mediation between borrowers and lenders, children and the homeless affected by foreclosure, financial counseling, and legal aid.

Homeowners who borrowed from Freddie Mac or Fannie Mae are already being shortchanged by the settlement. Inappropriate use of funds on the state level may additionally continue to hurt those directly affected by the foreclosure crisis.

Related articles

• Ohio To Use Foreclosure Settlement Funds Meant To Aid Homeowners To Demolish Homes (thinkprogress.org)
• Some money from mortgage settlement to be diverted (mysanantonio.com)
• Pruitt rejects relief money for Oklahoma foreclosure victims – -Only state to opt out (alialawgroupforeclosurenews.com)

Last week, a mortgage settlement between the government and big banks was put into place. The agreement, which allots 20 billion to 1 million U.S. homeowners for lowering debts on their homes or for refinancing with lower interest rates, is considered by the President to be the largest federal-state settlement in history, and he said to the press:

“No compensation, no amount of money, no measure of justice is enough to make it right for a family who’s had their piece of the American dream wrongly taken from them. And no action, no matter how meaningful, is going to by itself entirely heal the housing market. But this settlement is a start.”

But, is this notion accurate? Although the settlement offers relief to some, nearly half of all homeowners (specifically, those with home loans through government housing finance agencies Freddie Mac and Fannie Mae) are left in the cold. So, what, exactly, will the settlement achieve? To break it down:

• Aside from the $20 billion, another $1.5 billion goes to approximately 750,000 homeowners who lost properties to foreclosure between 2008 and ’11. This amounts to $1,500 to $2,000 per individual.
• Banks have three years to distribute the aid.
• The amount banks give out is tied to their market shares. Bank of America will distribute $11.8 billion, Wells Fargo $5.4 billion, JPMorgan Chase $5.3 billion, Citigroup $2.2 billion, and Ally $310 million.
• The banks are being partially held accountable for their past practices, such as robo-signing.

Although all points are a small step toward resolving the financial crisis, a few negative points clearly stand out. First, why no aid to those with Fannie Mae/Freddie Mac mortgages? Although the government proposed incentives to the two entities, no plan or resolution has been reached. Second, economists think that the settlement will give no boost to the economy, as the amount is drawn out over three years. Third, $2,000 or less to each homeowner who lost property to foreclosure is really only a drop in the bucket.

Related articles

• $26B Mortgage Settlement a ‘Modest’ Help: Experts (newser.com)
• Mortgage Settlement: Do the Big Banks Owe You Money? (usnews.com)
• Why Millions Won’t Get Help From Big Mortgage Settlement (gloucestercitynews.net)

What happens to foreclosures once seized by the government? The properties, essentially, sit, empty and waiting for a buyer once they go up for auction. According to the Lancaster Eagle Gazette, the government is planning to sell about 83,000 foreclosures nationally in the near future, with the hardest hit areas being some of the first to be relieved of this burden. The foreclosures, once sold to investors, will become rentals.

The Federal Housing Finance Agency, the federal conservator of Fannie Mae and Freddie Mac, is overseeing this undertaking. Some state-level officials are uncertain of the investors’ intentions, as evidenced by the Gazette piece, but the Federal Housing Finance Agency isn’t taking just anyone. Experience and knowledge of real estate investment assets and risk management are the determining factors. Additionally, all investors will be pre-qualified for a given number of years.

Although this action would remove a significant number of foreclosures from the market (83,000 out of 200,000 government-owned), communities, such as the Columbus metropolitan area, are concerned, particularly about rentals being permanent and lowering the overall neighborhood price. At the same time, demands for renting are increasing, and more housing in this regard would better fulfill needs. Additionally, getting foreclosures off the markets – which, in areas like Las Vegas, significantly contributed to lowered prices and underwater mortgages – might bring some stability to communities hit hard by the housing crisis.

On a government level, turning foreclosures into rental properties lessens the Federal Housing Administration’s, Fannie Mae’s, and Freddie Mac’s burdens. As the latter two organizations were bailed out, rental properties end up lessening taxpayers’ losses.

Although foreclosures bought as single-family homes is the most ideal situation, it’s simply a pipe dream in today’s real estate market, marked by greater lending restrictions and undermined by widespread unemployment. Because foreclosures contribute to lower average prices and underwater mortgages, getting them off the market somewhat halts the plummeting prices.