(Reuters/Rebecca Cook)

Three and a half years after Congress allocated $7.6 billion to help struggling homeowners from defaulting on their mortgages, states have been slow to spend that money, leaving billions in federal coffers as the housing market recovers.

A new report from the special inspector general overseeing funds appropriated by the Troubled Asset Relief Program shows that 18 states and the District of Columbia, which were given access to the money, have spent just $1.7 billion since the bill passed Congress in 2010. In the meantime, those states have dramatically revised downward the number of homeowners they believe they can help.

The report sparked a bureaucratic tussle between the inspector general’s office, which said the Treasury Department hadn’t followed its earlier recommendations, and Treasury, which said it was working with states to spend the money wisely and that the spigot had opened in the past year.

The so-called Hardest Hit Fund, allocated by the Housing Finance Agency Innovation Fund, was to help an estimated 546,000 homeowners through various state-sponsored programs, according to estimates delivered in early 2011. But as of June, the states and the District reported that they had spent money helping just 146,356 program participants, barely a quarter of their initial estimates.

According to the inspector general’s report, the states haven’t even asked for much of the money. They have drawn down just $2.7 billion as of the middle of this year, 35 percent of the program’s total appropriations. More than $300 million has been spent on administrative costs, while states are holding $719 million in cash reserves.

The District and all 18 states that have received grant money have set up programs to provide unemployment assistance. Most states have programs to modify mortgages or provide transition assistance. Five states have programs to help homeowners with second liens, and seven have programs to help homeowners with past-due bills. One state, Michigan, uses the funds to demolish unoccupied homes.

Types of HHF programs available by state:

(Source: SIGTARP Quarterly Report to Congress)

Many of the states offered initial assessments of how many homeowners they could help, assessments that appear overly optimistic. At the beginning of 2011, Florida estimated it could provide past-due assistance to 53,000 homeowners. As of this past June, Florida had provided assistance to 7,334 homeowners, the inspector general reported. Ohio estimated at the end of 2010 that it could provide transition assistance to 4,900 homeowners under one program and 6,500 under another; by the end of June, the state had provided help to just 21 homeowners under the first plan, and none under the second program.

The TARP inspector general criticized Treasury for failing to follow earlier recommendations on how to get the money out the door faster.

“[R]ather than fix the problem that SIGTARP warned Treasury about in its [April 2012] audit, Treasury allowed the problem to get worse,” the auditors wrote. “Treasury is refusing to hold itself or the states accountable to any goal of the number of homeowners to be assisted in HHF, and the result has been that the program is reaching far fewer homeowners than the states expected in 2011.”

HHF funds allocated under TARP legislation:

Treasury said the money was better spent cautiously and over the long term. State housing authorities and the Treasury Department say the housing market has been so volatile — first in collapsing, then in recovery — that states have had to recalibrate their programs to adequately dispense HHF money.

“Treasury and the states are focused on whether the money is being used wisely, not just whether it’s being spent,” said Assistant Treasury Secretary Timothy Massad. “What we’re trying to do is work with the states. We bring them together frequently to figure out what works well and what doesn’t.”

The states “had to build administrative operations” to spend the money properly, Massad said. “It’s not just like flipping a switch.”

Jim Parrott, a senior fellow at the Urban Institute and a former senior adviser to President Obama’s National Economic Council, also said it was important for the states to take their time on this.

“It shouldn’t be surprising that at the beginning of this program states don’t get a ton of money out the door. They have to decide exactly which challenges they want to address and which programs are best suited to address those challenges, and then they need to build the infrastructure needed to implement the programs,” Parrot said. “All of that takes an enormous amount of time to get right. The alternative is to rush the money out the door through programs that waste money and don’t help enough people.”

A quarterly report issued in the middle of this year shows the rate of payments have increased in recent months. The number of homeowners who have received assistance has doubled in the past year, and the amount of money spent has tripled.

“What you’ll see is a pretty significant ramp-up of both commitments and outlays as states better understand both the problems they are trying to tackle and how best to tackle them,” Parrott said.

But most states participating in the program still have hundreds of millions — in some cases billions — to spend.

Overall, Alabama has spent 13 percent of the $162 million in TARP funds it was allocated. Arizona has spent just 11 percent of the $267 million it could have received. More than $1.9 billion was made available to California, which has drawn $717 million from the program but spent just $381.6 million —  19 percent of the total.

HHF funds spent by state:

Indiana has spent only $18.8 million of the $221 million set aside for troubled homeowners, or 8 percent. The state estimated in 2011 it could provide unemployment assistance to 16,257 homeowners; through the end of June, it had helped 1,859 homeowners.

Only three states — Nevada, Oregon and Rhode Island — and the District of Columbia have drawn more than half the money originally allocated through Hardest Hit Funds. Oregon has received $155 million of the $220 million; it has spent $105.4 million, about 48 percent of available funds.