Already, three states have announced plans to divert some of their share of the $26 billion foreclosure fraud settlement with the nation’s five biggest banks away from helping homeowners (which is the money’s intended purpose), and towards other parts of their respective budgets. Wisconsin and Missouri are planning to use the money to plug budget holes, while Ohio wants to use the funding to demolish vacant homes.

And those states are evidently not the only ones planning to use the settlement funds for something other than helping troubled homeowners, as the Associated Press noted:

In Pennsylvania, where a fourth straight budget deficit is projected, Democrats are pressing the Republican-run attorney general’s office to use some of its $69 million payment to offset $2 billion in cuts to programs that benefit education, the elderly, disabled or poor. [...]

Vermont plans to use $2.4 million from the settlement to help balance its budget. Maryland Attorney General Doug Gansler said about 10 percent of his state’s $62.5 million payment will be made available for the governor and lawmakers to spend as they choose.

It’s understandable, given the massive budget cuts that states have had to implement in the last few years to comply with balanced budget requirements during a recession, that there is a temptation for state lawmakers to use an unexpected windfall to plug budget holes. But as good as their intentions are, that is not the purpose of the settlement. Settlement money is meant to make up for bank malfeasance by reducing loan principal for underwater homeowners or to compensate families to lost their homes due to potentially wrongful foreclosure.

Member of the Florida congressional delegation have already penned a letter to Florida Attorney General Pam Bondi (R) in an attempt to head off a similar effort to siphon away funds, writing, “given the ongoing state of Florida’s housing crisis, we strongly urge you to use these settlement funds for housing relief, and resist any effort to divert the funds to close shortfalls in the state budget.” Hopefully more states don’t go down the road of the six listed above, and actually use the settlement money to alleviate the ongoing pain of the housing crisis.

More than 200 protesters have been fighting to save the home of Arturo de los Santos, an ex-Marine who went into foreclosure after Chase Bank advised him to skip payments to speed up a loan modification he never received. In early February, amid rumors that Riverside, California sheriff’s deputies could serve papers on the home at any time, organizers from the Alliance of Californians for Community Empowerment and other groups surrounded the home, and de los Santos petitioned the sheriff to prevent eviction.

At the time, de los Santos said he was prepared to get arrested to save his home, and last Thursday, he was, according to The New Bottom Line:

Arturo de los Santos, his family, and scores of supportes went to the Los Angeles headquarters of Freddie Mac on Thursday, February 16 to protest his foreclosure and eviction, to ask Freddie to restore his mortgage, and to let his family keep their home. After refusing to leave the lobby of the office, the police were called and Arturo was arrested.

Watch video of de los Santos’ arrest:

De los Santos took his case to Freddie Mac because it insured his original mortgage and is thus servicing the foreclosure. Before taking his case to Freddie Mac, de los Santos offered to make the payments he had been advised to miss, but Chase refused his money. “Chase told me to talk to Freddie Mac, because they were only servicing the loan and Freddie underwrote it, but Freddie told me to talk to Chase,” he told the Huffington Post.

De los Santos was served with another eviction notice last week, asking him to vacate the property by 6:01 a.m. yesterday, but said he would not comply with the notice. Though the deadline passed more than 24 hours ago, de los Santos, his wife, and their four children are still in the home and have not been evicted, according to those with knowledge of the situation.

The problems facing de los Santos’ mortgage are not unique. Banks have come under fire for illegal, mistaken, and fraudulent foreclosures — the same day de los Santos was arrested, an examination of 400 San Francisco-area foreclosures found that nearly all of them had legal issues, and 84 percent had “one or more clear violations of law.” The home modification programs meant to help struggling homeowners like de los Santos, meanwhile, have fallen woefully short of their goals.

Already, two states — Missouri and Wisconsin — have set out plans to use funds from the $26 billion foreclosure fraud settlement to balance their budgets, rather than their intended purpose of helping troubled homeowners avoid foreclosure or get out from beneath underwater mortgages. Now, Ohio is set to become the third state to divert the funds from foreclosure prevention, instead using the money to tear down old, vacant homes:

Ohio, which is receiving $97 million in its direct payment from last week’s settlement, plans to allocate $75 million to demolish vacant and dilapidated homes dragging down the values of neighboring properties, Attorney General Mike DeWine said Feb. 9.

At least 100,000 homes need to be demolished, DeWine said, and he is establishing a program to match funds that cities and land banks allocate for tearing down houses.

This is a slightly more justifiable use of the foreclosure fraud settlement money than that decided upon by Wisconsin or Missouri, as vacant homes drag down home values for entire neighborhoods, pushing homeowners further underwater, But the settlement money is supposed to aid homeowners directly, not in a roundabout way.

Plus, there is already a party responsible for the vacant homes blighting Ohio’s cities: the banks that own them. The city of Cleveland has been trying, without much success, to force banks to pay for the upkeep of foreclosed-upon homes, in order to prevent them from becoming a drag on local economies. “We would have much rather spent that money helping families and creating homes rather than knocking houses down that we believe are owned by some very well-resourced banks,” said Chris Warren, Cleveland’s chief of Regional Development, on his city’s demolition of empty homes. And now even more money that is meant to help homeowners will instead go towards literally clearing away the banks’ mess.

Our guest blogger is David Min, Associate Director for Financial Markets Policy at the Center for American Progress Action Fund.

Critics of the mortgage settlement negotiated between the state attorneys general and five of the nation’s biggest banks have claimed that the $25 billion settlement is merely a drop in the bucket compared to the size of the overall housing market problems. But is this a fair characterization?

The settlement will help over a million households, and provide $25 billion in relief to struggling homeowners, including an average of more than $20,000 in principal reduction for approximately one million homeowners. This appears to be a relatively small number of homeowners being helped when compared with the 11 million households that are currently “underwater,” owing a total of $699 billion more on their mortgages than their homes are worth.

But this simple comparison ignores the fact that this settlement is limited to mortgages that were originated for private label securitization. According to the Federal Housing Finance Agency, approximately 35 percent of the nine million loans originated for Wall Street securitization are currently underwater, with an average negative equity balance of about $50,000.

In other words, one in three underwater homeowners with a mortgage originated for Wall Street securitization is going to receive loan forgiveness equal to nearly half of their negative equity.

Critics are also ignoring the fact that the settlement is narrowly tailored to claims around robo-signing and other foreclosure process violations, claims which have very uncertain litigation value and would have taken a long time to resolve. Under the terms of this deal, state and federal prosecutors are free to pursue all other mortgage fraud claims, of which there are many. As the banks themselves understand, they are still subject to an enormous amount of potential liability around their past and present wrongdoings.

When we take these items into consideration, yesterday’s settlement seems like a lot bigger deal than most of the critics are willing to acknowledge. Certainly, the state AG settlement is not a solution to the problems of the housing market, but it is clearly a good and important step towards rectifying the problems of the housing market and holding accountable those responsible.

Yesterday, 49 states joined the federal government in announcing a $26 billion settlement with five of the nation’s biggest banks over the banks’ foreclosure fraud abuses. The money from the settlement is meant to aid homeowners who lost their homes to foreclosure or who find themselves underwater, meaning they owe more on their mortgage than their home is currently worth.

However, Wisconsin Gov. Scott Walker (R) — whose high profile assault on workers’ rights has prompted a recall effort against him — isn’t planning to use the money to help homeowners. Under the terms of the settlement, Wisconsin is set to receive $140 million, $31.6 million of which comes directly to the state government. And Walker is planning to use $25.6 million of that money to help balance his state’s budget:

Of a $31.6 million payment coming directly to the state government, most of that money – $25.6 million – will go to help close a budget shortfall revealed in newly released state projections. [Wisconsin Attorney General J.B. Van Hollen], whose office said he has the legal authority over the money, made the decision in consultation with Walker.

“Just like communities and individuals have been affected, the foreclosure crisis has had an effect on the state of Wisconsin, in terms of unemployment. … This will offset that damage done to the state of Wisconsin,” Walker said.

A memo from Wisconsin’s Legislative Fiscal Bureau released yesterday notes “it is anticipated that Wisconsin will receive $31.6 million. Based on discussions between the Attorney General and the administration, of the amounts received by the state, $25.6 million will be deposited to the general fund as GPR-Earned in 2011-12, and the remaining $6 million will be retained by the Department of Justice to be allocated at a later date.”

Milwaukee Mayor Tom Barrett (D) criticized Walker’s move, saying “not one dime [of the settlement] should be used to fund the unbalanced state budget.” Adding insult to injury, Walker has previously criticized using one-time settlement money to fill budget holes.

The settlement money already doesn’t come close to addressing the depths of the nation’s housing problem, though it will provide real relief to the people whom it does reach. But the money was certainly not intended to paper over state budget problems, particularly in a state whose governor assured everybody up and down that busting his state’s public unions was the key to fiscal solvency. (HT: Jessica Arp)

Today, 49 states joined the federal government in finalizing a $26 billion settlement with five of the nation’s biggest banks over the banks’ foreclosure fraud abuses. The money will be used to aid homeowners, both through direct payments and by reducing mortgage principal for homeowners who find themselves owing more on their mortgage than their home is currently worth.

In terms of the size of the housing problem, as Reuters’ Agnes T. Crane and Daniel Indiviglio noted, $26 billion is a “mathematical drop in the bucket,” considering that homeowners are underwater by some $700 billion. As far as being a knock for the banks, Nasdaq.com columnist Daniel Pereira noted that the $26 billion is about half what the four publicly traded banks involved in the settlement made in profits last year:

The $26 billion represents a significant settlement, but it clearly won’t stagger the banks too much. Together, the four banks mentioned above took in a total profit of $47.6 billion in 2011. It’s not as if the banks will be paying the settlements out of pure profits, either; they’ve all set aside a fair amount of capital to pay for their mistakes. Still it’s telling that the banks will be paying just about half of their annual profits to walk away from the foreclosure mess.

Several state attorneys general were hesitant to join the settlement, fearing that the terms were too easy on the banks and that the extent of the banks’ fraudulent activities had not been uncovered. As we noted before, the settlement protects the banks from state and federal lawsuits pertaining to some abuses, such as “robo-signing” foreclosure documents, but doesn’t prevent individuals from moving forward with their own individual actions against the banks.

While it certainly won’t be a panacea for all that ails the housing market, it will certainly help those people who, until this point, had little hope of receiving a principal reduction any other way.

Fresh off the news that government backed mortgage giant Fannie Mae knew about foreclosure fraud abuses being committed by the nation’s biggest banks as far back as 2003, but did nothing, Bloomberg News reported today that Fannie Mae also “pulled the plug” on a plan to help underwater homeowners in 2010. In a letter, Senate Democrats quote a former Fannie Mae employee who claims that the plan was ready to go, but was killed at the last moment because Fannie Mae executives were “philosophically opposed to writing down principal balances”:

A former Fannie Mae employee told the committee that the mortgage finance company had developed a pilot program for reducing mortgage debt for borrowers who owe more on their house than the property is worth.

The purpose of the plan was to develop “a responsible way to reduce principal balances for underwater mortgage borrowers without creating undue incremental moral hazard,” the employee told the committee.

The pilot had preliminary approvals from officials at Fannie Mae, FHFA, and the Office of the Comptroller of the Currency, a bank regulator, according to the former employee.

In mid-2010, two weeks before its launch, senior Fannie Mae executives cancelled the program because they were “philosophically opposed to writing down principal balances,” according to the former worker, who was quoted in the letter without being identified.

Edward DeMarco — the acting head of the Federal Housing Finance Agency, the regulator for both Fannie Mae and Freddie Mac — has also been, as one former administration official said, a “boulder” in the way of allowing the mortgage giants to reduce principal for troubled homeowners, on the grounds that it would be bad for Fannie and Freddie’s bottom line. Meanwhile, “some economists counter that while principal reductions might lead to a short-term hit for Fannie and Freddie, it would ultimately result in fewer underwater mortgages, fewer foreclosures and a healthier housing market — all good for Fannie and Freddie’s bottom line.”

The opposition to principal reductions within Fannie Mae, according to Bloomberg, seems to be much more pernicious, in that they think mortgage writedowns are an unfair bailout for homeowners. But this ignores the fact that many homeowners are underwater — owing more on their mortgage than their home is currently worth — not due to anything they did but because of the 2008 bursting of the housing bubble and the foreclosure epidemic that followed, which dragged home values down to a point from which they have yet to recover.

Republicans across the political world have struggled to comprehend the causes of the financial crisis since it began roiling the American economy nearly five years ago. Former Pennsylvania Sen. Rick Santorum (R), now one of the GOP’s two leading presidential candidates, hasn’t been immune, going all-in on the notion that government policy, government-sponsored housing programs, and government regulation were the main drivers of the crisis, a claim that has been repeatedly debunked.

On the campaign trail in Colorado this week, however, Santorum offered an even further out there explanation for the crisis. According to the Colorado Independent, Santorum told one crowd that gasoline and oil prices rose so sharply in the build-up to the collapse that they caused Americans to default on their mortgages in droves, thereby triggering the housing crisis that is still acting as a drag on the nation’s economy:

Stressing the importance for the country to provide cheap energy to its citizens, Santorum blamed the recession not on sub-prime mortgages or the derivatives market but on spiking fuel prices.

“We went into a recession in 2008. People forget why. They thought it was a housing bubble. The housing bubble was caused because of a dramatic spike in energy prices that caused the housing bubble to burst,” Santorum told the audience. “People had to pay so much money to air condition and heat their homes or pay for gasoline that they couldn’t pay their mortgage.”

The theory that rising oil prices blew up the housing market exists only in Santorum’s mind. “All The Devils Are Here,” an inside account of the crisis written by Fortune editor and columnist Bethany McLean and New York Times columnist Joe Nocera, doesn’t mention oil or gas prices a single time. New York Times financial reporter Aaron Sorkin’s “Too Big To Fail,” another inside account, never points to oil prices as a factor in the crisis. And the official government report about the crisis, the Financial Crisis Inquiry Commission Report, mentions oil prices multiple times as a symptom of the declining economy but never blames rising prices for the collapse of the housing market.

In reality, the primary cause of the financial crisis is quite clear. Mortgage lenders and large banks, driven by an insatiable thirst for profits, divvied up subprime mortgages and junk loans into mortgage backed securities, credit default options, and various forms of derivatives, then sold them around the world, creating a housing bubble that burst the minute the market overheated. Unfortunately, in their quest to prevent Wall Street banks and rogue mortgage lenders from taking responsibility, many Republicans have created an alternate reality in which anything else — even something as disconnected as fuel prices — caused the crisis, even if those claims have no basis in reality.