States Diverting Shares of the Mortgage Settlement Payout

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It seems like there's always somebody who wants to get ahold of your money.  If you live in California or a few other states and were affected by mortgage fraud, it may be the state itself that's after your cash.  Proposals made recently by California Governor Jerry Brown seek to make a number of budget cuts to reduce spending, but they also want to appropriate $410 million intended for victims of robo-signing and other mortgage fraud that was intended for California homeowners as part of the federal mortgage settlement with the "Big Five" lenders that I'm sure you remember from the last year.  The worst part is that this is entirely legal; while the settlement "encouraged" states to use the money for homeowner recovery, there was nothing in the settlement that stated they actually had to do so. We all know that when good intentions are not followed through, bad consequences (and regrets) usually do.

I can scarcely think of the words to describe how unacceptable this is.  It wasn't the states that lost homes and were robbed of thousands of dollars by falsified foreclosure documents and other types of mortgage fraud.  It was the homeowners, many of whom are still struggling to recover from the financial and emotional blows of having their homes stolen from them so that major banks could make a little bit of extra profit.  They were the ones who had received a glimmer of hope when the settlement was finally agreed to, and now they're the ones who will have to learn that the financial assistance they were due is going to be used elsewhere.

And as I said, California isn't the only state that's doing this.  Arizona, another state that was hit hard by mortgage fraud, has diverted approximately half of its share of the settlement to state general funds.  Georgia, Maine, South Carolina and Wisconsin have also shifted most if not all of their share away from homeowners to cover state expenses.  A number of other states are still discussing what to do with the funds, and may follow along with this disturbing trend once that decision is made.  Out of the $2.5 billion settlement, less than $260 million is currently scheduled to make it to homeowners; it's worth noting, of course, that there are several states that are still deciding how much to pay out to homeowners so that figure will go up.

California Attorney General Kamila Harris, one of the Attorneys General that fought for over a year to see the banks reach a settlement with the government in the first place, has already issued a protest against the proposal in her state; Harris vows to work to find a balanced budget option that "honors [the state's] obligations to California home owners."  Arizona's Attorney General is doing the same.  Not everyone is complaining about the change, however; Iowa Attorney General Tom Miller, the leader of the coalition that negotiated the settlement in the first place, is actually defending the use of settlement money as general funds and saying that the amounts that were being diverted were only a "very small" portion of the full settlement.

Now don't get me wrong, I'm not trying to downplay the financial problems that these states are experiencing.  California, for example, has had to make a lot of cuts that nobody wants to make, in some cases taking millions of dollars away from state programs to try and get the budget deficit under control.  Some states have been trying desperately to stay out of bankruptcy for years.  I understand this, and any decision made in such a situation isn't made lightly.  The difference in this situation, though, is that the cuts and budget considerations being made are cuts to state programs that are funded with state or federal money.  The settlement payment isn't a result of a state program, and the money isn't state or federal money; it's a settlement from a massive lawsuit on behalf of the citizens of the United States, and those who were defrauded by the banks deserve what little restitution they were granted.

Every state that dips into the settlement to cover state expenses is taking the money out of its own citizens' pockets, and in the case of states like California where the entire settlement amount could be taken it's making those citizens into victims for a second time.  If you want to see how your state is handling the money, ProPublica is keeping an up-to-date tally of fund allocation on its website. If your state is one that is taking settlement money for use in general funds, I encourage you to contact your state representatives and tell them exactly how you feel about it.

To find additional info on mortgage servicing related issues, read a few earlier blogs.


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Deborah Madden, the now-retired technician at the heart of the cocaine-skimming scandal that led police to shut down the drug analysis section of their crime lab. Harris's office has been unable to vouch for the reliability of Madden's work and has dismissed more than 600 drug cases since the scandal became public in February. Madden testified at trials before leaving the lab in December. Under a 1963 U.S. Supreme Court ruling, Brady v. Maryland, district attorneys are obligated to provide defense attorneys with information in their possession about prosecution witnesses that could be used to challenge their credibility.

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