WASHINGTON (Reuters) - President Barack Obama’s housing secretary has launched a roadshow to ensure the benefits of the $25 billion mortgage settlement with the nation’s biggest banks will live up to the hype, ahead of the November presidential election.
The settlement nudged states to use their roughly $2.5 billion portion of settlement funds for housing relief and related efforts, but more than a dozen states are considering using the funds to plug budget holes.
Transferring the funds could limit total relief those states’ residents might see, Housing and Urban Development Secretary Shaun Donovan is telling attorneys general, governors and state legislators around the country, and could also dull any potential political impact of the settlement.
Housing and Urban Development Secretary Shaun Donovan has spent the past few weeks crisscrossing the country, visiting states from California and Colorado to Arkansas and Tennessee, to showcase efforts to use the funds for housing counseling and legal services, and promote the larger impact that could have.
“What I said to governors, is look, you should know that if you don’t use this money for counseling and legal services and outreach...your citizens, they may not benefit from the other pieces of the settlement,” Donovan said in an interview.
It isn’t unusual for cabinet officials to promote the White House’s message in an election year.
Donovan’s firepower has been critical for a president eager to show that he is delivering relief to Americans struggling with their mortgages after housing prices plummeted more than 30 percent since their 2006 peak and unemployment skyrocketed during the recent financial crisis.
President Barack Obama’s track record on the economy and housing has been a target for Republicans ahead of his bid for re-election in November.
Housing advocates who work closely with troubled borrowers say it’s too soon to tell whether meaningful relief is coming out of the $25 billion settlement reached in February, though some said they have seen a few loan modification offers that cited obligations under the settlement.
Nearly 11 million borrowers nationwide are underwater -- meaning they owe more on their mortgage than their property is worth.
As part of the settlement, the nation’s five largest banks - Bank of America (BAC.N), Citigroup (C.N), JPMorgan Chase (JPM.N), Wells Fargo (WFC.N), and Ally Financial - pledged to cut mortgage debt amounts and restructure troubled loans.
The deal resolved accusations they pursued faulty foreclosures and misled borrowers who sought loan modifications.
The $2.5 billion chest divided among the states serves as civil penalties and supports foreclosure-prevention efforts.
Colorado Attorney General John Suthers, a Republican, for example, said his state planned to use about $51 million to fund counseling services, affordable housing programs, outreach efforts and a foreclosure hotline for borrowers. Donovan visited Denver on Monday to help promote the settlement and discuss the new efforts.
But officials in other states, including California and Arizona, have suggested they will use the funds in other ways.
The Arizona legislature and its governor, Republican Jan Brewer, for example, decided to use $50 million of the $97 million the state received to fill the state budget and cover prison construction.
California governor Jerry Brown has proposed using the funds to finance the state’s debt.
If states don’t use the funds for counseling and outreach, Donovan said, it could limit the ability for their struggling homeowners to receive the larger benefits of the settlement, since they won’t have access to counselors who can guide them through the process of applying for a loan modification.
A recent study from HUD found that delinquent borrowers who worked with housing advocates were nearly twice as likely to obtain a modification than those who attempted to do so on their own.
“Unless families get counseling, they are much less likely to find out there is help available to them, and to successfully go through the process of completing that help,” Donovan said.
Reporting By Aruna Viswanatha and Margaret Chadbourn; editing by M.D. Golan