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Shafted! Why are Homeowners Still Left to Struggle Against Big Banks Alone?

Across the country, states are diverting foreclosure settlement funds to plug budget holes.

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The wording of the settlement does seem to give the states significant wiggle room to redirect funds:

To the extent practicable, 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 or deceptive acts or practices and to compensate the States for costs resulting from the alleged unlawful conduct of the Defendants. Such permissible purposes for allocation of the funds include, but are not limited to, supplementing the amounts paid to state homeowners under the Borrower Payment Fund, funding for housing counselors, state and local foreclosure assistance hotlines, state and local foreclosure mediation programs, legal assistance, housing remediation and anti-blight projects, funding for training and staffing of financial fraud or consumer protection enforcement efforts, and civil penalties.

According to Mark Ladov and Meghna Philip of New York University’s Brennan Center on Justice, repurposing funds is a direct violation of the settlement. “Arizona is violating the legal terms of the agreement, which unequivocally directs that the state ‘shall’ use the funds for foreclosure-related purposes only,” they wrote in an op-ed for the Arizona Republic.

Some of the states are using the poached settlement funds for what would otherwise be laudable programs. Indiana, for instance, is planning to use some of its repurposed funds to provide energy assistance to low-income residents. But noble as those intentions are, the settlement was not meant to help states fill in a bevy of gaps in their budgets; it was meant to provide a specific kind of aid, addressing a specific, pressing problem.

Some progressives have pushed back on efforts to redirect settlement money. “This decision takes away the one chance Arizonans had to get some help navigating the banking bureaucracy that greased the skids on millions of foreclosures. It’s a clear statement of principles, that’s for sure,” said Rep. Raul Grijavla, D-Ariz. “While the state is undeniably facing a difficult budget gap, these funds should be used to help Californians stay in their homes,” said California Attorney General Kamala Harris (D).

The fact of the matter is that housing remains an anchor on the economic recovery, and the funds provided by the settlement, while not fixing the problem entirely, will certainly help. In Arizona, the money could provide aid to 85,000 homeowners, according to estimates by the Arizona Housing Alliance. But the states seem intent on taking the funds, and the hope that comes with it, right out of homeowners’ hands, leaving them to continue struggling against the biggest banks alone.


Pat Garofalo is economic policy editor for His writing has also appeared in the Nation, the Atlantic, U.S. News & World Report, and other publications. Follow him on Twitter at @Pat_Garofalo.

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