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Intro: "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."

Protesters staged a rally against home foreclosures in California on Tuesday outside the State Capitol in Sacramento. (photo: Max Whittaker/NYT)
Protesters staged a rally against home foreclosures in California on Tuesday outside the State Capitol in Sacramento. (photo: Max Whittaker/NYT)



States Diverting Foreclosure Relief Money to Pay Down Debt

By Shaila Dewan, The New York Times

17 May 12

 

undreds 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 Gov. Jerry Brown 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 has decided to use the discretionary money for economic development,” said a spokesman for Nathan Deal, Georgia’s governor, a Republican. “He believes that the best way to prevent foreclosures amongst honest homeowners who have experienced hard times is to create jobs here in our state.”

Andy Schneggenburger, the executive director of the Atlanta Housing Association of Neighborhood-Based Developers, said the decision showed “a real lack of comprehension of the depths of the foreclosure problem.”

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.

Shaun Donovan, 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,” he said Tuesday.

Some attorneys general have complied quietly with requests to repurpose the money, while others have protested. Lisa Madigan, the Democratic attorney general of Illinois, said she would oppose any effort to divert the funds. Tom Horne, 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 Mr. Horne 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 Mr. Horne from transferring the money.

In California, Attorney General Kamala D. Harris 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. So Mr. Brown’s revised budget put her in an awkward position.

“While the state is undeniably facing a difficult budget gap,” she said in a statement, “these funds should be used to help Californians stay in their homes.” Both officials are Democrats.

When asked if Mr. Brown 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 Ms. Harris declined to comment.

Just last week, Ms. Harris 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, Attorney General Eric T. Schneiderman 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,” said Maeve Elise Brown, the executive director of Housing and Economic Rights Advocates, based in Oakland. “But in the long term the more people we have going through foreclosure, the worse it’s going to be for our economy as a whole.”

In some states, redirecting the money could have a racially discriminatory effect, said Alan Jenkins, the executive director of the Opportunity Agenda, which supports homeownership, because in some cities black homeowners disproportionately lost their homes, Mr. Jenkins said.

“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,” Mr. Jenkins said.

 

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+14 # dkonstruction 2012-05-17 06:47
The fact that it isn't just right wing conservative govenors/states doing this (e.g., Jerry Brown in Cal.) should be enough for all those here that keep chanting that we just need to vote democratic and everything will be o.k. Don't get me wrong, i am not saying that the republicans would not be worse (although in many areas i frankly don't see alot of substantive difference) but that doesn't mean we should yet again blindly line up behind democrats who then just turn around and screw us in a "kinder and gentler" fashion than their more brutish republican compatriots.

If these funds were awarded to the states to help homeowners who were wrongly foreclosed on then how is this not a massive misappropriatio n (we used to call it theft) of funds and why is this not a prosectuable offense?

One of the lessons from all of this also has to be that progressives became far too dependent on the courts instead of "taking power" into their own hands by coming to the aid of those about to be foreclosed on (like the communist party did in the 1930s with "eviction watches" that prevented thousands of evictions by moving people's stuff back into their apartments after the landlord had put it out on the streets) and occupying vacant properties and giving them over to those in need (since there are now 5 vacant properties for every homeless person in the country this could wipe out homelessness immediately and provide alot of jobs rehabbing these properties.
 
 
+3 # readerz 2012-05-17 08:27
The communists didn't do as much in the 1930s as the general understanding of what a good neighbor meant. People volunteered a lot more; people went on strike no matter the consequences, and stood up to power, and most of those people who stood up to power were not members of the communist party. My parents were Democrats, but my grandparents were Republican, and they got a deal from their bank to keep them in their house because of the town's persistence, and they never said anything against the arrangement. Democrats have more support of unions, but they need to be watched too; it is good that money was given to help foreclosures (for example), but it is certainly up to the People to make sure the funds aren't embezzled or misdirected. Also, big money went into state elections recently; many state governments have a majority of Republicans in legislatures, and they trample all over the rights of people, including taking away the right to vote.

You do have a good point: we need to be watchful, and helpful to those who need it, and not wait for the government to help.
 
 
+1 # dkonstruction 2012-05-17 11:59
readerz, i suppose that the question of whether the communists (meaning the cp usa) did or did not do much in the 1930s is a longer conversation (though, for the record, i am not now nor have i ever been a stalinist or supporter of the "vanguard party" model though my folks were long time members until they, like much of the US base, learned the truth about stalin beginning with Krushev's 1956 "cult of personality" speech and left the party)...it was always my understanding though that it was basically the cp (although i think the Wobblies also organized similar activities) that was behind the "eviction watch" organizing and activities that did stop some evictions (though i have yet to find hard numbers or estimates on how many) particularly in NYC and the bronx in particular...th ey were also behind the creation of the unemployed councils (which would certainly be helpful today)
 
 
+1 # jwb110 2012-05-17 09:54
Oddly, it is the responsibility of Democrats in power in the states to show the way to the rest of the nation by easing mortgage problems and using funds on a state basis to create work assistance programs that help generate the tax base.
Any investment in creating jobs is a better long term solution than moving funds from aiding a state population to paying debts just for the sake of paying debts.
I also think that states mandating either a bank fix on the mortgage or a foreclosure that requires a domicile not sold or rented within 6 months to be torn down in order to keep surrounding neighborhoods from the crime that empty houses create.
 
 
-2 # billbaskin 2012-05-19 07:50
Government spending earmarked to help homeowners has been woefully underutilized for years (how often do govt programs come in hugely under budget?). Short sighted policies like redirecting these funds to pay CA's bloated budget, will only widen the budget deficits, as foreclosures continue to drive down property values and eliminate the "Wealth Effect" and the corresponding spending that accompanies it. It is eroding the tax base and increasing deficits, and 60% of CA is effectively "underwater" on their mortgages.

The budget deficit in CA is being driven by foreclosures. Harvard did a study showing that each foreclosure cost the city of Boston $960,0000 in economic loss per foreclosure. Yet, our politicians allow the CA Bar to run rampant in their efforts to push lawyers out foreclosure prevention, HUD counselors have been de-funded as of Jan 2010, and are now paid for by the very banks that are the problem. All this despite a DOJ settlement with major servicers that outlined "Unsafe and unsound" practices by servicers relating to loan modifications and foreclosures.

Martin Andelman, a leading homeowner advocate and regular contributor to RSN wrote a great piece on the subject http://mandelman.ml-implode.com/2012/05/the-better-business-bureau-the-state-bar-loan-mods-lawyers-in-california/ that helps demonstrate how little our government and regulatory agencies understand the nature of the crisis, and how little they are doing to address it.
 

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