States using robo-signing funds to plug budget gaps

Despite protests from dozens of public interest groups and the state’s attorney general, California is set to use $411 million in funds coming to the state from the robo-signing settlement with mortgage servicers to help plug the state’s massive budget gap.

Under the $25 billion agreement with the nation’s five largest mortgage servicers over so-called "robo-signing" practices, states were allocated a total of $2.5 billion in cash penalties, of which at least $974 million (or nearly 40 percent) has thus far been diverted to balance state budget deficits or pay for programs unrelated to the foreclosure crisis, ProPublica reported.

Most of the settlement funds, about $20 billion, will come in the form of credits for homeowner relief, including short sales, loan modifications, principal reductions, and for helping underwater borrowers refinance.

Under the terms of the settlement, states were encouraged to use the $2.5 billion in penalties on programs related to the foreclosure crisis, but not required to do so. Last month, California Gov. Jerry Brown proposed using California’s chunk of the money, $410.6 million, for existing expenditures in the state’s general fund, including the cost of repaying more than $3 billion in housing-related bonds.

Of the total, $292 million would go towards paying off the state’s $15.7 billion budget deficit this year, and the remaining $118 million would be allocated for next year’s budget. On Friday, California Democrats sent the governor a proposed budget that would shift even more of the settlement funds — $342 million — toward paying down the budget deficit this year.

Should California decide to redirect that money, the most populous state in the nation would join several other large states in diverting most or all of those settlement funds, including Georgia, Missouri, Virginia, Texas and Wisconsin, according to ProPublica.

In addition, Arizona’s legislature and governor have approved using $50 million of the $98 million allocated to the state in the settlement to balance the state’s budget. Late last month, public interest law firms filed a lawsuit against the state on behalf of homeowners, The Arizona Republic reported.

California Attorney General Kamala Harris, who helped negotiate the settlement, opposes the governor’s proposal. She had planned to use most of the funds to create new programs devoted to homeowner counseling and legal aid, according to news reports.

On June 8, 73 legal aid and housing counseling agencies signed a letter to the governor urging that the funds be used in direct aid to borrowers, according to the California Public Interest Research Group (CALPIRG), a nonprofit public interest advocacy organization.

"The funds are a significant resource that will help correct the housing market, drive overall economic recovery and improve the state’s tax base," CALPIRG said.

"The funds could prevent more foreclosures by providing housing counseling services and other relief to homeowners in crisis and providing legal support to prevent improper, illegal and fraudulent foreclosure documentation."

Citing a national report issued by the Urban Institute in December 2011, CALPIRG emphasized that each prevented foreclosure saves an average of $70,600 in avoided costs, including moving expenses, legal fees, administrative charges to homeowners, lender losses, reduced property values, and other costs to local governments.

"It’s ironic that Gov. Brown would propose taking money from people struggling to pay off mortgage debt because he’s struggling to pay off the state’s debts," said Pedro Morillas, CALPIRG’s legislative director, in a statement.

"Instead of providing long-term solutions for struggling homeowners, the settlement money is going to serve as a short-term stopgap in the budget."

To see an interactive map of how states are using funds from the foreclosure deal, visit ProPublica.