State Governments Using Settlement for Other Things

Story first appeared in The New York Times.

Hundreds of millions of dollars meant to provide a little relief to the nation’s struggling homeowners is being diverted to plug state budget gaps.

In a budget proposed this week, California joined more than a dozen states that want to help close gaping shortfalls using money paid by the nation’s biggest banks and earmarked for foreclosure prevention, investigations of financial fraud and blunting the ill effects of the housing crisis. California was awarded more than $400 million from the banks, and the Governor has proposed using the bulk of that sum to pay the state’s debts.

The money was part of a national settlement valued at $25 billion and negotiated with five big banks over abuses in their mortgage and foreclosure processes.

The settlement, reached in February after a year of talks and intervention by the Obama administration, was the second-largest in history involving the states, trailing the tobacco industry settlement, and represented the first large-scale commitment by banks to provide direct aid to borrowers.

As part of the settlement, the banks agreed to pay the states $2.5 billion, money intended to help homeowners and mitigate the effects of the foreclosure surge. But critics complained that this was the only cash the banks were required to pay — the rest comes in the form of “credits” for reducing mortgage debt and other activities. Even that relatively small amount has proved too great a temptation for lawmakers.

Only 27 states have devoted all their funds from the banks to housing programs, according to a report by Enterprise Community Partners, a national affordable housing group. So far about 15 states have said they will use all or most of the money for other purposes.

In Texas, $125 million went straight to the general fund. Missouri will use its $40 million to soften cuts to higher education. Indiana is spending more than half its allotment to pay energy bills for low-income families, while Virginia will use most of its $67 million to help revenue-starved local governments.

Like California, some other states with outsize problems from the housing bust are spending the money for something other than homeowner relief. Georgia, where home prices are still falling, will use its $99 million to lure companies to the state.

The governor of Georgia has decided to use the discretionary money for economic development. He believes that the best way to prevent foreclosures amongst honest homeowners who have experienced hard times is to create jobs here in the state.

The $2.5 billion was intended to be under the control of the state attorneys general, who negotiated the settlement with the five banks — Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally. But there is enough wiggle room in the agreement, as well as in separate terms agreed to by each state, to give legislatures and governors wide latitude. The money can, for example, be counted as a “civil penalty” won by the state, and some leaders have argued that states are entitled to the money because the housing crash decimated tax collections.

The federal housing secretary has been privately urging state officials to spend the money as intended. Other uses fail to capitalize on the opportunities presented by the settlement to bring real, concerted relief to homeowners and the communities in which they live.

Some attorneys general have complied quietly with requests to repurpose the money, while others have protested. The Democratic attorney general of Illinois, said she would oppose any effort to divert the funds. The Republican attorney general of Arizona, said he disagreed with the state’s move to take about half its $97 million, which officials initially said was needed for prisons. But he said he would not oppose the shift because the governor and the Legislature had authority over budgetary matters. The Arizona Center for Law in the Public Interest has said it will sue to stop the transferring of the money.

In California, the Attorney General had played hardball in the settlement negotiations, holding out until the very end for a deal guaranteeing that a large share of the benefits would go to California, and then trumpeting her success in a news conference and a flurry of interviews with national news outlets.

While the state is undeniably facing a difficult budget gap, these funds should be used to help Californians stay in their homes.

When asked if the Californian governor could legally appropriate the money, which is supposed to be held in a special fund for the benefit of California homeowners affected by the mortgage/foreclosure crisis, a spokesman for the attorney general declined to comment.

Just last week, the attorney general announced plans to give about half the money to groups that provide housing counseling and legal assistance to homeowners — groups whose budgets have shrunk while demand for their services grows. The other half would be used primarily for investigation of mortgage-related crime.

States using some or all of their money for housing have designated it for a wide variety of programs, like a small fund for low-interest loans to build housing in low-income neighborhoods, in Virginia, and Ohio’s sweeping plan to demolish abandoned property.

In New York, the Attorney General stepped in with $15 million in settlement money for housing counseling and legal assistance when state support ran out last month, and plans to spend the bulk of its $130 million on similar programs. North Dakota will use its tiny allotment, $1.9 million, to provide housing to police officers and emergency responders in its booming oil-field counties, where shelter is scarce.

Using the money for other purposes is shortsighted, housing advocates warn. If you leave homeowners hanging out there to dry, then in the short term maybe you help to meet the budget gap this year, but in the long term the more people we have going through foreclosure, the worse it’s going to be for the economy as a whole.

In some states, redirecting the money could have a racially discriminatory effect, because in some cities black homeowners disproportionately lost their homes. If you dump all of these funds into the general coffers, the African-American homeowners are not going to benefit in any real way because they represent such a small percentage of the larger state.

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