March 18 2014
National Review Online
Jillian Kay Melchior
Three not-for-profits are suing the state of California in an attempt to cash in on the 2012 mortgage settlement, claiming that the state used the multi-billion-dollar settlement to plug its budget hole instead of helping homeowners.
The advocates charge that Sacramento should have given some of the money to borrowers struggling to meet their mortgage obligations. Instead the state government used hundreds of millions from the settlement to pay its own bills. The nonprofits are seeking a bigger chunk of the settlement pie and point to Governor Jerry Brown’s rosy budget predictions as justification.
“We made it clear to the governor at that time that we did not agree with his decision,” Robert Gnaizda, who is representing the National Asian American Coalition in the suit, told the New York Times. “But we didn’t want to bring a case when the state was in such an enormous fiscal crisis. With the governor now talking about possible surpluses of up to $10 billion before he finishes his second term, we decided to proceed with our case.” Gnaizda’s group, along with COR Community Development Corporation and the National Hispanic Christian Leadership Conference, wants more money for struggling-borrower programs.
In February 2012, the federal government, together with 49 states, strong-armed America’s five biggest banks into forking over $25 billion, the biggest consumer financial-protection settlement in U.S. history. The settlement rested primarily on claims that banks pushed through legal documents related to mortgage defaults without proper review procedures, resulting in wrongful foreclosures.
Only a miniscule portion of the $25 billion went to a few homeowners who had truly been wronged — in large part because such victims were scarce, despite what politicians proclaimed.
In reality, most of those who lost their homes lost them for justifiable reasons. Many borrowers had taken out steep loans on properties more lavish than they could afford and were in default on their mortgages, at a time when the vast majority of responsible Americans continued to pay on time.
Mortgage Bankers Association data since 2005 reveal that even at the height of the mortgage default crisis in the first quarter of 2010, the default rate for all mortgages never reached 15 percent. Of those, prime mortgages, which make up about three-quarters of all U.S. mortgages, saw a top default rate of slightly less than 11 percent. More than 40 percent of subprime mortgages were in default at that time, but these constituted only about a quarter of all mortgages. No relief was ever considered for the nearly 90 percent of U.S. homeowners who continued to pay their mortgages, on time and in full, through the longest period of economic stagnation since the Great Depression.
Worse still, state governments have largely reneged on their already dubious promise to help out bad borrowers. According to a study by the housing nonprofit Enterprise Community Partners, within six months after the settlement, less than half the money given to the states even went to housing. Instead, states treated the settlement money as general-fund revenue.
In California this windfall proved handy in covering the state’s chronic budget shortfall. The Golden State used the settlement money to close its deficit. In Arizona, another state with a high foreclosure rate, the state supreme court this summer ruled that Phoenix could divert $50 million in settlement money to the general fund. In Texas, $124 million went to the general fund, while only $10 million went to provide legal service to poor families.
Though settlement money was advertised as a way to succor homeowners and prevent foreclosures, courts throughout the country have historically ruled against targeted revenue streams and allowed governments to treat all income as general-fund revenue. Not surprisingly, states have found creative uses for the money. Kentucky is putting millions toward improving prescription-drug compliance; Iowa has spent some of the money on infrastructure; in Indiana, settlement money is helping fund a low-income energy assistance program; in Michigan and Ohio, it’s paying for blight demolition; and in Louisiana, “reportedly, $1 million will go towards covering the costs associated with Chinese drywall litigation,” the Enterprise Community Partners study found.
The settlement meant a $25 billion loss for shareholders and investors in Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial. These banks had, without a doubt, given home loans to people who didn’t merit and couldn’t afford them — but often they did so at the prompting of the federal government, which encouraged such irresponsible lending practices. In that context, it’s pretty shameless for state governments to pocket the money while denouncing their partners in the financial sector.
Among such undeserving competitors for the $25 billion, it’s hard to pick anyone to support. What the California suit proves is that this was a money grab all along.
— Jillian Kay Melchior writes for National Review as a Thomas L. Rhodes Fellow for the Franklin Center. She is also a senior fellow at the Independent Women’s Forum.