States Divert Foreclosure Settlement Funds Away From Housing

On May 13, California Gov. Jerry Brown revised his proposed state budget in regard to the $410 million cash payment that the Golden State was pegged to receive from the recent $25 billion National Mortgage Settlement with the nation's five largest banks. Although California Attorney General Kamala D. Harris – who played a prominent role in the coalition of state attorneys general that negotiated the settlement – had initially announced that half of the $410 million would be used to finance housing counseling and legal services agencies working with distressed homeowners, Brown's budget ignored the Harris plan and slotted the funds to cover interest payments on the state's housing project bonds.

Harris, in a statement issued by her office, objected to Brown's plans. ‘The state Department of Justice stood firm for over a year against the nation's largest banks on behalf of California homeowners harmed by the foreclosure crisis,’ she said. ‘While the state is undeniably facing a difficult budget gap, these funds should be used to help Californians stay in their homes.’
Actually, Harris was being somewhat charitable about the state's ‘difficult’ financial problems – California is currently operating on a $15.7 billion deficit. But the state is hardly alone is channeling its settlement funds away from housing services and into other funding concerns.

According to a report issued by Enterprise Community Partners, a Washington, D.C.-based affordable housing organization, only 26 states are ‘substantially’ using their settlement funds for housing. Nine states are using part of their funds for housing, six are not using the funds for any housing efforts, and nine are ‘completely open as to how their funds will be used.’ (The report includes the District of Columbia among the states; Oklahoma signed a separate pact with the five banks in the National Mortgage Settlement.)

The National Mortgage Settlement is specific about how states should use the $2.5 billion in direct payments from the agreement.

‘To the extent practicable,’ the settlement says, ‘such funds shall be used for purposes intended to avoid preventable foreclosures, to ameliorate the effects of the foreclosure crisis, to enhance law enforcement efforts to prevent and prosecute financial fraud or unfair and deceptive acts or practices, and to compensate the states for costs resulting from the alleged unlawful conduct of the defendants.’

However, the settlement has no enforcement power to ensure the states use their funds in this manner. Among the states that are diverting their funds away from housing, Alaska has committed $1 million of its $3.2 million for the state division of banking and securities, with the usage of the remaining funds to be determined. Georgia is using all of its $99 million on economic-development endeavors, while Missouri is using most of its $39.5 million to soften the impact of planned cuts to local higher education. North Dakota is using its $1.9 million to develop housing for law enforcement officers and emergency responders serving the communities around the local oil industry.
Republicans in the South Carolina House of Representatives voted to give all of its $31 million to the state's commerce department for incentives to encourage business relocation efforts; the state attorney general, however, has proposed using the money to fund shelters for homeless veterans and battered women.

The Virginia legislature has proposed offering $1 million of its $66.5 million to the State Corporation Commission's Bureau of Financial Institutions, with the rest of the money used to fund cash-starved municipal governments and a 3% pay raise for state employees.

In other states, the National Mortgage Settlement funds are being partially allotted for a housing-related purpose – albeit not always for specific homeowner assistance. For example, Utah has slotted $2 million of its $21.9 million to the attorney general's office to hire mortgage and financial fraud investigators, while Wisconsin is putting $3 million from its $26 million to finance mortgage fraud investigations. Both states, however, are putting the bulk of their money into the general fund to cover the wider budget.

Reaction to the diversion of the National Mortgage Settlement funds has been mixed. Paul Leonard, director of the Center for Responsible Lending – California, is unhappy about the squabble between the California governor and attorney general.

‘We are deeply concerned about the proposed use of the attorneys general fund for deficit reduction,’ he says. ‘Certainly, the folks who worked hard to support a strong settlement are also very disappointed.’

Leonard, however, notes that Brown's announcement was not made lightly. ‘The pressures to balance the budget are intense,’ he adds. ‘It was not an easy matter.’

Marx Sterbcow, managing partner at New Orleans-based Sterbcow Law Group LLC, is uncertain whether some of the states are fully cognizant of the circumstances behind the push for the National Mortgage Settlement.
‘Either they are obtuse to what happened in the marketplace for housing or they are so deep in debt that they are letting the homeowners fend for themselves,’ he says. ‘Some states are directing their resources the right way, but for others this is a cash cow to help them plug their budgets.’

Dr. Anthony B. Sanders, distinguished professor of real estate finance at George Mason University in Fairfax, Va., agrees with the notion of the settlement as a cash cow.

‘The attorneys general, along with the Obama administration, used robo-signing – an economically victimless event – as an excuse to seize billions of dollars from large banks to cover state budget shortfalls caused by chronic government overspending,’ he says. ‘I think that summarizes it nicely.’

However, Francis X. Riley III, partner with Princeton, N.J.-based Saul Ewing LLP, argues that the state funds are being used to help the housing markets by bolstering the viability of the fragile local economies.
‘In Georgia, for example, the greatest potential impact of saving homes is to get the economy moving again,’ he explains. ‘This is simply better than education or loan modifications.’

Riley also notes that the National Mortgage Settlement was designed to deliver cash payments to the state governments, not specifically to the offices of the attorneys general.

Adam Leitman Bailey, a New York real estate attorney and law professor at New York University, concurs with Riley, adding that he believes the funds are being used correctly.

‘The states are starving for money,’ he says. ‘The homeowners who defaulted on their mortgages and are living for free in their homes should be the last ones to receive any money. That would be the first decent move to come from the settlement. And an even better place for the money to go would be toward incentives for first-time home buyers.’

Phil Hall is the editor of MortgageOrb. He can be reached at


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