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

It was with great fanfare that the Obama administration, alongside nearly every state’s attorney general, announced in February that a $25 billion accord had been reached with the nation’s five biggest banks, settling charges that the banks engaged in widespread foreclosure fraud. Those billions were intended to provide relief to struggling homeowners, using the banks’ own money to help the victims of Wall Street malfeasance.

“These banks will put billions of dollars towards relief for families across the nation,” President Obama said. “They’ll provide refinancing for borrowers that are stuck in high interest rate mortgages. They’ll reduce loans for families who owe more on their homes than they’re worth. “

However, more than a dozen states across the country are doing their best to undermine the settlement by diverting the funds to other areas of their budgets. Arizona recently became the latest state to do so, taking $50 million meant to aid homeowners and instead plowing it into the state’s general fund (after scrapping an earlier plan to use the money to pay for prison construction).

Under the terms of the settlement, each participating state receives a lump sum to craft its own housing aid programs. (The banks are also responsible for directly helping homeowners with a large share of the settlement money.) The funds directed to the states were intended to support counseling, foreclosure mediation, mortgage modification programs, and legal services for those facing the prospect of losing their homes.

But states are taking advantage of loose wording in the settlement to use the funds for, essentially, whatever they want, since a pot of free money is simply too tempting for state legislators who have faced years of budget woes. “There’s a lot of pressure on the budget,” said Arizona House Speaker Andy Tobin (R) to justify his state’s move.

While it’s true that state budgets have been hammered, so have American homeowners. The financial crisis of 2008 and the ensuing Great Recession threw millions into foreclosure. More than 11 million others found themselves underwater, owing more on their mortgages than their homes are currently worth, according to data from the real estate firm Core Logic.

And the pain felt by families across the country won’t end there. William Dudley, president of the Federal Reserve Bank of New York, estimated that 3.6 million Americans will lose their homes to foreclosure in the next two years.

The Obama administration has rolled out a host of programs to help families stay in their homes, but the results of those efforts have been underwhelming, to say the least. The Home Affordable Modification Program, for instance, was meant to help between three and four million homeowners, but has yet to aid even one million. The impotence of the administration’s efforts makes the settlement that much more important.

It’s perhaps no surprise that Wisconsin’s ultra-conservative Republican governor, Scott Walker, was the first to redirect settlement money, dumping $26 million of his state’s $30 million allocation into Wisconsin’s general fund in order to balance his budget. Missouri lawmakers were next, placing all $40 million of their share into Missouri’s higher education budget.

Even Jerry Brown, California’s Democratic governor, used some accounting sleight-of-hand in order to plug a hole in the Golden State’s general fund with the settlement money. "We have time to work on the budget, but we're looking for money where we can find it,” Brown said.

As Enterprise Community Partners, an affordable housing group, has documented, party politics plays little role in these decisions, as the states diverting foreclosure settlement funds run the gamut from deep red to deep blue: Kansas, South Dakota and Vermont are all on the list of those using the money for purposes other than housing aid.

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.

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