States use mortgage deal money to plug budget holes

Some states are using their mortgage settlement payouts to bolster their budgets.

NEW YORK (CNNMoney) -- States are getting $2.5 billion from the national mortgage settlement, but not all of that money is going to help troubled homeowners.

At least two states -- Missouri and Wisconsin -- are using the funds to plug big holes in their budgets. This does not sit well with some consumer advocates, who would prefer to see the money go to help those suffering from the housing crisis.

Federal and state officials last week announced a $26 billion foreclosure settlement with five of the largest home lenders over allegations of improper foreclosures based on robosigning and faulty paperwork. The vast majority of the funds will be used to provide principal reduction or refinancing, as well as payments to borrowers who lost their homes.

States, which took the lead in negotiating the deal, also got a tidy bundle. The settlement says the attorneys general may distribute the money to foreclosure relief and housing programs, such as counseling, legal assistance and mediation initiatives.

But, like in the 1998 tobacco settlement that was supposed to fund health programs, states have some leeway in how they use the money.

The attorneys general of Wisconsin and Missouri have opted to turn the state portion of their settlements over to their governors and lawmakers. Missouri's take comes to about $41.4 million, while Wisconsin should receive $31.6 million.

Missouri Attorney General Chris Koster said he felt the state's elected representatives should be the ones to decide how to use the funds. He's holding onto about $1 million to administer the rest of the $140 million settlement.

Governor Jay Nixon has proposed sending $40 million to the state's public colleges and universities, restoring about 40% of the spending cut for higher education for fiscal 2013. The governor said he is committed to making college more affordable and accessible for state residents.

Wisconsin, meanwhile, is putting $25.6 million into its general fund to plug a $143.2 million budget hole. The state legislature will decide how to use the money. The attorney general will hold onto the remaining $6 million, which it may use for housing-related programs.

Asked why the entire state portion isn't being used for foreclosure relief, a spokeswoman for Attorney General J.B. Van Hollen pointed out that 82% of Wisconsin's total $140 million settlement amount is going to homeowners. She said states were also harmed by the housing collapse.

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"The foreclosure crisis played a key role in the economic downturn in recent years and this downturn that contributed to the current budget issues facing the state," said Dana Brueck, the spokeswoman.

Consumer advocates, however, disagree.

All the funds should go to help troubled homeowners since that was the purpose of the settlement, said Barry Zigas, director of housing policy for the Consumer Federation of America. Though most of the money is going to borrowers, it's not sufficient to meet the need.

In Wisconsin, for instance, Tom Cannon would love to get a piece of the state funds. Cannon, who directs the Legal Aid Society of Milwaukee, said he could use the money to represent more homeowners facing foreclosure. His organization is suffering after Governor Scott Walker last year eliminated $2.5 million in funding for legal aid groups.

"The settlement was meant to steer money to people who lost their homes, the largest investment they'll ever make," Cannon said. "It's not intended to fix the budget shortfalls of states that are underwater themselves."