State to Use Mortgage Fraud Settlement Funds to Balance Budget

May 9, 2012

A legal fight is brewing over the decision by lawmakers and the governor to tap a mortgage fraud settlement to help balance the budget. 

Five mortgage lenders agreed to pony up $26 billion earlier this year to settle claims that they acted illegally in dealing with homeowners who sought mortgage relief. Most of Arizona's $1.6 billion share will go to those who are underwater on their mortgages, with other funds to aid those who already lost their homes to lender misconduct. And the state got nearly $98 million which attorney Tim Hogan of the Center for Law in the Public Interest said is supposed to go to counseling and legal help for those in mortgage trouble. Only thing is, the new budget directs Horne to give $50 million of that to the treasury. Hogan said that would be illegal.

"Trust funds are treated differently," said Hogan. "This is a trust. He's got duties as a trustee to spend the money and direct its use consistent with the permissible purposes."

Horne said he told lawmakers taking the money was a bad policy.

"But this wasn't just the Legislature," the Attorney General pointed out. "It was the Legislature and the governor. And those are the two bodies under our constitution that control the budget. And it would be suicidal of me to get into a war with both the Legislature and the governor over a matter that is clearly constitutionally within their area of responsibility."

Hogan wants a judge to resolve the issue -- and quickly: Absent an injunction, Horne said he will give the cash to the state treasurer when the new fiscal year begins July 1.