Tom Barrett
Tom Barrett MICHELLE STOCKER - The Capital Times

Wisconsin plans to use about $26 million of its $140 million share of a national mortgage settlement to help plug the state's budget hole — a move Milwaukee Mayor Tom Barrett on Friday called "unconscionable."

Attorney General J.B. Van Hollen's office made the decision in consultation with Gov. Scott Walker to use most of the $31.6 million paid directly to the state to balance the budget rather than to help the thousands of Wisconsin residents who have lost their homes to fraudulent mortgage practices.

Local homeowner advocates also were reeling from the decision Friday. "I'm disappointed that the much-needed funds will not be used as intended for programs that are on the front lines, working with homeowners who are trying to save their homes from foreclosure," said Ellen Bernards, a nonprofit financial educator and co-chair of the Dane County Foreclosure Prevention Taskforce.

Walker said Thursday that the foreclosure crisis had a "direct impact on the economy," lowering tax collections. The $26 million from the settlement will help defray that fiscal damage, the governor said.

A new projection released Thursday shows the state faces a $143 million budget shortfall by July 2013, due in part to lower-than-expected tax revenues.

Van Hollen on Friday defended the decision, saying that the settlement reached between five large banks and 49 attorneys general "recognized that states, as well as individuals, were harmed by the foreclosure crisis, and it was contemplated from early on that a portion of the funds might be allocated to a state's general fund."

But Barrett said none of the money should be used for budget relief.

"This is money that clearly was intended for families and neighborhoods devastated by this foreclosure crisis," Barrett said. "These are families that were victims of a bait and switch, and what the governor and attorney general are doing is their own bait and switch."

The vast majority of Wisconsin's share of the $25 billion national settlement is directed toward property owners harmed by foreclosure abuses between 2008 and 2011. The banks have agreed to reduce principals, refinance mortgages and make payments of up to $2,000 to homeowners struggling to pay their mortgages and those that have lost homes.

Democratic state lawmakers Friday circulated a bill that would require legislative approval before any of the money could be used to balance the budget. Republicans have majority control of the Legislature, so the proposal is unlikely to go anywhere.

And U.S. Rep. Tammy Baldwin, D-Madison, on Friday sent a letter to Walker and Van Hollen urging them to reconsider.

"It is crucial that the settlement money go to relieve actual mortgage fraud victims and prevent future foreclosures, rather than plug the state budget deficit," Baldwin wrote.

Barrett, a Democrat, is considering running against Walker, a Republican, in a possible recall election. Barrett lost to Walker in the 2010 race for governor.

Barrett said all of the $31.6 million coming directly to the state should be used to help homeowners and foreclosure mitigation programs, especially those in Milwaukee. The city has 6,000 properties in foreclosure plus another 4,800 that have been abandoned, he said.

As part of the settlement, Walker on Thursday proposed a $1 million statewide anti-blight program to demolish such homes. But Barrett said tearing down the abandoned housing in his city alone would cost $48 million.

Van Hollen, a Republican, said Barrett was wrong to focus on just a narrow piece of the money coming to Wisconsin.

"The overwhelming majority of that $140 million is going to go to Milwaukee, is going to be able to help homeowners who are in trouble in Milwaukee, reimbursing homeowners who were foreclosed upon and shouldn't have been, preventing or remediating blight and creating jobs," Van Hollen said.

— State Journal reporters Dee J. Hall and Karen Rivedal contributed to this report.