The ink’s barely dry on the historic settlement of “robo-signing” and other abusive foreclosure practices by five big banks. But, already, some states are raiding the settlement funds to finance activities having nothing to do with preventing foreclosures or preserving homeownership. Their actions are a second slap in the face to millions of Americans who were wronged by lender misconduct and inadequate consumer protections. They are unjust, shortsighted, and, quite possibly, illegal.
The $25 billion settlement between 49 state attorneys general, the Obama administration, and the nation's five largest mortgage companies announced its intention “to remediate harms allegedly resulting from the alleged unlawful conduct of the [banks].” The National Association of Attorneys General explained that “the settlement addresses past mortgage loan servicing and foreclosure abuses and fraud, provides substantial financial relief to borrowers harmed by bank fraud, and establishes significant new homeowner protections for the future.”
The settlement has produced some important and positive changes. It is aiding many struggling homeowners by reducing their mortgage principal to fair and affordable levels and allowing them to refinance at today’s lower rates. It requires covered banks to provide a single point of contact for homeowners, mandates adequate staffing levels and training, and ends “dual-track foreclosures,” in which servicers foreclose on homes while still negotiating loan modifications with their owners.
But alongside those positive steps, a growing number of states are diverting funds from the settlement to fill general budget gaps and for other unrelated purposes. Georgia and Wisconsin acted swiftly to raid their settlement funds, over the protests of lawmakers and advocates who supported the deal. California, Missouri, Nebraska, and others are following suit. According to the non-profit investigative journalism organization ProPublica, states have already diverted $974 million from the settlement to reduce budget deficits or fund unrelated activities.
Diverting settlement funds away from home opportunity is a new violation of the American people’s trust. The data company RealtyTrac predicts as many as 1 million new foreclosures this year—nearly 200,000 more than in 2011. Every penny of settlement resources should be invested in heading off that catastrophic outcome while mitigating the effects of foreclosures that have already occurred.
Raiding settlement funds is also shortsighted, because supporting home opportunity is an investment in our economy, including state budgets. Proven strategies like principal reduction, housing counseling, and own-to-rent programs aid struggling homeowners, to be sure. But they also improve neighborhood home values, increase state and local tax revenues, reduce the need to maintain abandoned properties, and relieve the burden on social service agencies.
A coalition of housing and consumer protection groups that includes The Opportunity Agenda and the National Council of La Raza has released a Compact for Home Opportunity detailing over two dozen initiatives that can prevent foreclosures, ensure fair housing and lending, and rebuild the American Dream. Virtually any item in the Compact would be a valid use of settlement funds. But dumping those funds into states’ general coffers is irresponsible and outrageous.
It may also be illegal. The diversion of funds violates the stated purpose of the agreement, as well as its spirit. The wronged American homeowners who are, in legal parlance, the third-party beneficiaries of the agreement may have a right to demand proper usage of settlement funds.
In many states, moreover, diverting settlement funds has a racially discriminatory effect on minority homeowners and former homeowners. While most victims of bank misconduct are white, homeowners of color were disproportionately and intentionally targeted by brokers and lenders for flawed loans, and are overrepresented amongst those facing foreclosure. People of color represent less than 20% of the population in Wisconsin, for instance, but over 40% of the population in Milwaukee, where exploitation of homeowners was concentrated. The numbers in Georgia are similarly stark. Dumping settlement funds into the general treasury again disadvantages these homeowners struggling to regain their footing.
All of the states covered by the settlement have an obligation under the Fair Housing Act and the Civil Rights Act of 1964, respectively, to affirmatively further fair housing, and to avoid discriminatory patterns in their programs and activities. The diversion of funds may violate both of those provisions.
Everyone agrees that much more is needed to restore home opportunity around the country. But the settlement was an important step in the right direction. Diverting the resources that it produced violates the letter and spirit of the settlement, squanders an historic opportunity, and harms the very Americans whom the settlement was intended to help. It should not be allowed to stand.