Concerns Mount over State Handling of Mortgage Funds
States have siphoned mortgage settlement funds for purposes seemingly outside the realm of housing, raising some red flags.
Public outrage over business practices that harmed thousands of people. A legal crusade to make sure the corporations at fault were held responsible. A landmark payout intended to help the hardest-hit consumers and prevent the situation from recurring.
That’s the general storyline of the historic settlement state attorneys general and federal officials reached with the country’s five largest mortgage services companies earlier this year. In many ways, the mortgage settlement is similar to the massive tobacco-related lawsuits of the 1990s, which ended with tobacco companies paying more than $200 billion to states for various consumer-protection and antitrust violations.
The attorneys general launched their investigation into the mortgage companies in October 2010, after it was revealed that bank employees routinely “robo-signed” affidavits in foreclosure cases instead of verifying the facts. The banks also engaged in deceptive practices when offering loan modifications, and failed to offer non-foreclosure alternatives to borrowers with federally insured mortgages.
Under the terms of the settlement, which was announced last February, the banks will pay more than $25 billion, with $2.5 billion going directly to states for housing counseling and foreclosure prevention programs.
The mortgage settlement is much smaller than the tobacco settlement, but one similarity between them is raising alarms around the country: Just as states found novel – and in some cases dubious – ways to spend their tobacco settlement funds, states have also siphoned mortgage settlement funds for purposes seemingly outside the realm of housing.
Some say the stakes are even higher for the mortgage funds. The foreclosure crisis is still dragging down the economy, and advocates say states are compounding the damage by failing to use the settlement money to mitigate it.
Frank Woodruff, executive director of the National Alliance of Community Economic Development Associations, describes $2.5 billion as “a drop in the bucket for the foreclosure crisis…every single dollar has to be directed to it for it to have an effect.” So far, he says, many states have fallen short. “It’s a missed opportunity,” he says.
In the years since the tobacco settlement was reached, states have found countless ways to spend the money. Many spent it on smoking cessation and other public health programs, in line with the original purpose of the settlement.
But others have not, so much so that the Campaign for Tobacco Free Kids calls its annual report on the funds “Broken Promises.” Many have filled budget gaps. Others issued bonds against future payments to tap revenue sooner.
There have also been some more questionable uses. North Dakota, for instance, upgraded its state morgue, a use Tobacco Free Kids Vice President of State Issues Peter Fisher called “hugely ironic.” Virginia and North Carolina even gave some of their funds to tobacco farmers, arguing that reducing tobacco use would hurt them over time.
The way housing advocates see it, a similar dynamic is playing out today. Less than half the states’ funds have gone toward housing needs, according to a recent report from Enterprise Community Partners. Some states, including hard-hit California, have allocated none of their settlement toward housing initiatives, the report found.
“There was a lot of belief it would go to places where the help was needed,’ says Andrew Jakabovics, a co-author on the Enterprise report. “States came out and said, ‘Yes that’s very nice, we’re just going to take this and do something else with it.’”
So far, many have plugged budget gaps, with California being Exhibit A. Governor Jerry Brown’s decision to allocate 90 percent of his state’s $410.5 million share (the largest to any single state) to the general fund drew protests from Attorney General Kamala Harris. In Missouri, the state used nearly all of its $39.5 million to offset higher education cuts.
In Arizona, meanwhile, a move by the legislature to shift about half of its $98 million share to the general fund prompted outcry from many, even though the attorney general’s office signed off on the move. Advocates say that was a self-serving attempt to stave off equivalent cuts to the AG’s office, and they’ve filed a suit that is on appeal.
Other uses seem to exist in more of a grey area. Georgia and South Carolina both put funds toward economic development. But in the case of Georgia, they're tailored toward rural development, while the foreclosure fallout is seen as an urban problem. Indiana sent much of its share to its low-income energy assistance program.
Enterprise’s Jakabovics said spending the mortgage settlement on things other than housing is a “slap in the face” for homeowners who were hurt by the foreclosure mess. But it’s a familiar story anytime cash-strapped states come upon an unexpected windfall of funds. Gulf Coast states are already squabbling over how to handle settlement funds from the BP oil spill. For Fisher at Tobacco Free Kids, it’s all too familiar.
“We tried as hard as we can to fashion ways to wall off this money,” he says, recalling past debates over tobacco funds, “but there’s always ways for legislators to get around those firewalls.”
Not All Lost
While some states have diverted the mortgage money, others have found novel – and useful – ways to use it to blunt the foreclosure crisis. As the Enterprise report found, 25 states have invested in legal assistance to homeowners, 21 states have funneled money to housing counseling programs, and 13 states have used settlement dollars for foreclosure prevention. A handful of states have implemented loan modification programs, while Ohio has spent $75 million of its money to demolish vacant properties—always a tough sell for cash-strapped lawmakers.
“Local needs vary wildly, and this can be tuned to that,” Enterprise’s Jakabovics says. “Had there been a one-size fits all solution to this crisis we probably would’ve solved it a long time ago.”
But observers of the tobacco settlement caution that a state’s commitment to using settlement money in a relevant way can wane over time, especially when veteran state lawmakers are replaced by newcomers who may have different priorities. Fisher at Tobacco Free Kids offers some straightforward advice to housing advocates: “Do your utmost to build the strongest firewalls you can,” he says, “and early on.”