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Judge considers use of mortgage settlement money

While critics say the money should be used to help mortgage borrowers, a lawyer for the state said Wednesday that Arizona is entitled to use $50 million of its share of a multistate foreclosure settlement paid by lenders to help balance the state budget because it’s compensation for revenue lost due to the housing market collapse.

“Everyone who pays taxes in this state has been affected by this foreclosure crisis,” said Douglas Northrup, representing Attorney General Tom Horne. “It doesn’t have to be put aside for a narrow subset of people who were in danger of losing their homes …”

Tim Hogan, an attorney challenging the $50 million transfer to the general fund disagreed, saying that’s a legally shaky argument and that the money is intended for services and other uses directly related to mortgage foreclosures.

“Just sticking money in the general fund doesn’t improve or make better the foreclosure crisis,” he said. “You’re just spending money on state government.”

Arizona is not alone among states in using settlement money to prop up its budget, but other states have designated all or most of their shares to bolster or launch hotlines, financial counseling and other services and programs directly related to mortgage foreclosures.

Hogan, an Arizona Center for Law in the Public Interest attorney, said the only compensation the state can claim is for direct costs, such as the expense of investigating lenders’ mortgage practices.

Judge Mark Brain of Maricopa County Superior Court said he’d rule within several weeks on the opposing sides’ requests that he dismiss the lawsuit or block the transfer.

The $50 million represents slightly more than half of the $98.8 million of Arizona’s share of settlement money.

Aside from the money provided to state governments, other pots of settlement money are intended to compensate or help borrowers.

Much of the Arizona case centers on legal arguments about whether the challengers had a legal basis to sue and whether the Legislature could appropriate the money once Horne agreed to put it into a trust fund as part of the settlement.

A similar turf issue is playing out in Florida where Attorney General Pam Bondi is feuding with the Legislature over who gets to decide how to spend that state’s $334 million allotment.

Bondi has insisted that she be allowed to spend the money without having to get prior approval from the Legislature, while lawmakers contend they have constitutional authority to spend the money.

States’ approved uses for their settlement shares range widely.

A National Conference of State Legislatures summary said Colorado’s money is going for housing-related programs and services, Georgia is using its share for regional and rural economic development, and Nebraska’s is being deposited in the state’s rainy day fund.

Horne opposed the $50 million transfer on policy grounds when it was proposed by lawmakers, but he has defended it as legal. Citing the attorney-client privilege, his office declined to release a legal memorandum prepared when lawmakers were drafting the budget last spring.

The case is the latest of many in Arizona in recent years that challenged various budget provisions that raided special funds to help keep the general fund in the black, particularly during the worst budget fallout from the Great Recession.

Some of the legal challenges resulted in orders that the transfers were illegal, while others were upheld.

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