States Shift Foreclosure-Suit Funds

Thursday, 28 March 2013 19:27

By NICK TIMIRAOS: published on October 18, 2012 by The Wall Street Journal

When states received $2.5 billion from big banks in a mortgage-foreclosure settlement earlier this year, the expectation was that most of it would be used to aid distressed homeowners. But so far, less than half of the money has been designated for that cause—with much of the rest going to help close state budget gaps, says a report scheduled for release Thursday.

 

In March, 49 states reached a $25 billion settlement with five of the nation's largest mortgage lenders over charges that they had improperly processed foreclosures.

 

The agreement allowed the banks—Ally Financial Inc., Bank of America Corp., BAC -0.50% Citibank Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co.—to pay $20 billion of the settlement in the form of relief to distressed homeowners.

 

The states received $2.5 billion of the total. The agreement said the state money should be used "to the extent practicable…for purposes intended to avoid foreclosures," among other purposes.

 

But so far, only about $1 billion of the state funds have been designated for some type of homeowner aid while $1 billion will go toward state general funds. States haven't decided how to spend the remaining $500 million, according to the report by Enterprise Community Partners, a housing nonprofit.

 

Only 14 states plan to spend their entire allotment on housing relief, while an nine states are spending most of their funds for housing, according to the report.

 

Many of the largest states allocated the money to their general fund. "It's an incredible frustration," said Andrew Jakabovics, a senior policy director at Enterprise, who co-authored the report. More on Mortgages

 

U.S. Sues Wells Fargo for Faulty Mortgages (10/10/12) Firms Flock to Foreclosure Auctions (9/11/12) BofA Trails in Mortgage Pact (8/29/12) U.S. Households Chip Away at the Debt on Their Homes (8/29/12)

 

When the settlement was announced in February, federal and state officials hailed it as the largest government-industry accord since a multistate settlement with the tobacco industry in 1998. Throughout much of 2011, officials pressed for a quick deal, as opposed to a lengthy investigation and legal battle, to provide what they hoped would be immediate relief for struggling homeowners.

 

Shaun Donovan, the secretary of the U.S. Department of Housing and Urban Development, who played an active role finalizing the agreement, has urged state officials not to divert the settlement funds from housing.

 

Mr. Donovan said in a statement that it is an "extraordinary accomplishment" that in six months "states have allocated nearly a billion dollars for housing and antiforeclosure activities that would otherwise not have been available." He said officials "fully expect" that any unspent funds "will be used in a similarly beneficial fashion."

 

Seven states have yet to decide how to spend all or some of their money, according to the report. Others, such as Texas, have spelled out plans for the funds, but their legislatures haven't voted on them.

 

The unexpected windfall kicked off battles within states over how to spend the money.

 

Arizona's decision to designate nearly half of its $98 million payout for the state coffers prompted consumer advocacy groups to sue the state attorney general, Tom Horne.

 

"Virtually everything in the settlement is about providing relief for distressed homeowners," said Tim Hogan, executive director of the Arizona Center for Law in the Public Interest, which filed the lawsuit. "I don't see how you can take these funds for something else." A state judge dismissed the suit last week. Mr. Hogan said he plans to appeal.

 

Mr. Horne, a Republican who signed on to the settlement, said he, too, would have "preferred the funds go towards keeping people in their homes." But he said once the state's governor and legislature decided they wanted to use the funds elsewhere, "I felt my role was to defend their position."

 

Meanwhile, California Gov. Jerry Brown, a Democrat, opted to put his state's $410 million payout into existing state obligations, over the objections of the state attorney general, Kamala Harris. Ms. Harris, also a Democrat, said the funds should go toward counseling and legal aid for distressed homeowners.

 

In South Carolina, Republican Gov. Nikki Haley vetoed the legislature's move to divert $10 million of the state's $31 million fund to a campaign to lure out-of-state businesses, calling it "inappropriate" and a "raid." The legislature overturned her veto. The remaining $21 million went to the state general fund.