Foreclosure settlement path charted in report

2/19/2013

By MARY CLARKIN

By MARY CLARKIN

Special to The Telegram

The nationwide home foreclosure debacle prompted a lawsuit that produced a financial windfall for states in 2012.

States in the suit were encouraged to use those dollars to provide foreclosure relief and fund housing programs aimed at preventing foreclosures.

Spokespeople for Gov. Sam Brownback and Attorney Gen. Derek Schmidt supplied conflicting accounts of what happened to the money that came to Kansas. But it appears not much — if any — of the $13.778 million trickled down to the borrowers affected by abusive financial practices.

A housing crisis fueled the 2008 national recession, pushing home foreclosures to new peaks.

More than 3 million home foreclosures occurred annually from Jan. 1, 2008 through 2011 — the period covered in the lawsuit brought by the federal government, 49 states, and the District of Columbia against the five largest mortgage servicers: Bank of America, Wells Fargo, Citibank, J.P. Morgan Chase and Ally Financial/GMAC.

The plaintiffs claimed the institutions issued improper mortgages, prematurely foreclosed on properties, violated the rights of military service members and other homeowners, and used false and deceptive affidavits that were “robo-signed” by people not verifying data.

An approximately $25 billion-plus settlement was announced in February 2012, and implemented in April 2012.

The banks and the national mortgage settlement administrator assumed responsibility for alerting borrowers to file claims.

Most of the banks’ expenses in the settlement stem from the relief they must offer borrowers, ranging from refinancing loans to reducing the principal on loans to paying benefits for military members.

An Office of Mortgage Settlement Oversight was established. It reported that as of Sept. 30, 2012, banks had extended relief to more than 300,000 homeowners across the country, and extended more than $26.11 billion in gross relief — well beyond original expectations.

That report showed 734 borrowers in Kansas had received relief, and the total relief/benefit amounted to $24,420,341 for Kansans. The identity of the homeowners was not disclosed.

The settlement also allowed for about $2.5 billion to be divided among the 49 states — Oklahoma didn’t participate in the suit — and the District of Columbia. A share was determined by formula, taking into account the number of residential mortgages serviced, share of foreclosure starts, share of seriously delinquent loans, and share of negative equity mortgages.

Kansas’ cash allotment was $13,778,401.

The attorney general in each state was the point person for the funds. The settlement outlined how states should spend their proceeds:

“To the extent practicable, such funds shall be used for purposes intended to avoid preventable foreclosures, to ameliorate the effects of the foreclosure crisis, to enhance law enforcement efforts to prevent and prosecute financial fraud, or unfair or deceptive acts or practices and to compensate the States for costs resulting from the alleged unlawful conduct of the Defendants.

“Such permissible purposes for allocation of the funds include, but are not limited to, supplementing the amounts paid to state homeowners under the Borrower Payment Fund, funding for housing counselors, state and local foreclosure assistance hotlines, state and local foreclosure mediation programs, legal assistance, housing remediation and anti-blight projects, funding for training and staffing of financial fraud or consumer protection enforcement efforts, and civil penalties.”

Kansas leaders had other ideas.

An exhibit attached to the settlement described how states planned to spend their millions.

In comparison to some other states, Kansas chose to earmark fewer funds for homeowners or housing programs.

Kansas pledged the attorney general “shall dedicate not less than 25 percent of any cash payment” for the following purposes:

- Supporting the attorney general’s ongoing investigation and prosecution of suppliers in the housing and financial sectors who violate the law;

- Resolving consumer complaints filed with the attorney general to prevent foreclosures and remedy mortgage servicing abuses;

- Defraying the investigative, administrative and consumer education costs associated with this settlement, including but not limited to the dedication of additional staff to monitor compliance with its terms.

The remainder of Kansas’ funds would be deposited in the state general fund for appropriation by the Legislature, the settlement read.

The 25 percent commitment, at this point, has not been fulfilled.

New Jersey planned to spend its money on legal and investigative costs, as well as one or more housing and social service programs, including a mental health residential program.

Massachusetts said it would use some money to establish the Consumer and Community Foreclosure Relief Fund.

The state of Washington incorporated the settlement’s language about how the money should be spent into its strategy.

Some states wrote vague descriptions.

Vermont, for instance, submitted one sentence: “The state funds may be used for housing-related or other purposes.”

Texas said it would put more than 90 percent of its money into the general revenue fund, while Virginia proposed to place its money in the attorney general’s Revolving Trust Fund.

In Iowa, the attorney general office retained control over most of the money and the largest sum it earmarked, $6.4 million, went to mortgage help.

Minnesota allowed for direct payment funds to affected homeowners. Hawaii emphasized its monies shall be used for only “housing and financial counseling, public education, mediation, dispute resolution, and enforcement of laws and agreements protecting the rights of homeowners and lessees.”

On April 26, 2012, Brownback wrote a memo to legislative budget committee chairmen regarding a change to the budget he had introduced in January 2012.

The amendment included a transfer of funds from the attorney general to the state general fund for fiscal year 2013. The memo mentioned litigation, but did not identify the national mortgage foreclosure settlement.

“As in accordance with state law, the money was put in the State General Fund,” Sherriene Jones-Sontag, director of communications and press secretary to Brownback, told The News in an email.

Jones-Sontag also wrote that $4 million of that amount was transferred from the state general fund and “was given to the Attorney General’s Office for operations expenses.”

In his account of the money, Don Brown, a spokesman for AG Schmidt, explained that $8.3 million of the approximately $13.7 million from the settlement “was designated as a civil penalty and was deposited to the State General Fund,” as “pursuant to the terms of the settlement” and “pursuant to Kansas law.”

Brown said the 2012 Legislature subsequently transferred another $4 million from the attorney general’s office to the state general fund, leaving the attorney general with $1.4 million from the settlement.

Although Brown and Jones-Sontag had the $4 million transfer going in opposite directions, they both noted that the Legislature authorized housing aid.

Higher-income and tornado aid

Of the $4 million that went from the attorney general to the state general fund, at least $2 million was appropriated by the 2012 Legislature to enhance Kansas support for housing programs, according to Brown.

He referred to the same program Jones-Sontag mentioned, although she said the Legislature appropriated $2 million from the gambling revenue-funded Economic Development Initiatives Fund for housing, with another $2 million in the governor’s budget for the fiscal year starting in July 1. Also, another $600,000 was authorized from the general fund for housing, she said.

With that first $2 million, according to Kansas Housing Resources Corporation spokeswoman Catherine Couch, the agency started the Moderate Income Housing Program.

That program is “in response to the increased need for higher income workforce housing,” the web site states. The agency hopes the Legislature OKs the $2 million Brownback has proposed for the next fiscal year, Couch said.

The other $600,000 Jones-Sontag mentioned was targeted for Harveyville tornado victims, Couch said.

The recipients of Brownback’s budget amendment memo in 2012 were then-Senate Ways and Means Chairman Carolyn McGinn, R-Sedgwick, and House Appropriations Chairman Marc Rhoades, R-Newton. McGinn did not return a call, and Rhoades’ secretary relayed that Rhoades did not represent the Hutchinson area.

The Division of the Budget in the Kansas Department of Administration directed press inquiries to the governor’s office.

Iowa Attorney Gen. Tom Miller played the lead role among states’ attorneys general in the litigation against the banks.

Geoff Greenwood, director of communications for Miller, explained the seeming contradiction in the settlement between how states were advised to spend the money and the states’ expressed plans for the money.

Roughly half the states injected sizable chunks of the settlement into their general funds.

“We’re dealing with state statutes,” Greenwood said, and in many states, the Legislature has authority for dispersing money.

“Obviously, the intent is to address foreclosure-related problems,” Greenwood said, but foreclosures had a ripple effect in states, he said.

The settlement also encouraged states to “remediate the harms to the States and their communities” as a result of the foreclosures.

Because people were kicked out of homes, local and state governments lost tax revenues and experienced greater demand for social services, Greenwood noted. A foreclosed home adversely affects home values in the neighborhood, reducing the tax base and allowing the crime rate to rise, he also said.

One tool Schmidt is seeking to respond to the foreclosure problem is more staff.

In fiscal year 2012, the attorney general’s office had about 118 positions, according to the state budget. Brownback’s budget recommendation for the next fiscal year shows authorized positions for that office climbing to 130.

Schmidt has “requested authority to hire three additional staff members to enhance investigation into misconduct in the Kansas housing and financial sectors,” Brown wrote, also noting that “investigations are ongoing.”

“The attorney general, working with the Legislature, intends to comply fully with the agreement and will reach the 25 percent commitment through use of that remaining $1.4 million supplemented with other funds appropriated to the Office of Attorney General,” Brown stated.

The Reno County District Court Clerk’s office does not compile home foreclosure data.

But Chris Burk, at the Housing and Credit Counseling Inc. office in Lawrence, knows foreclose trouble persists.

“There is a pretty good demand for the counseling. We’re still seeing a lot of clients come in with major problems within their mortgage,” said Burk, who supervises credit counselors and does homebuyer counseling.

Clients are anywhere from two to eight months behind on mortgage payments and “trying to do what they can to save their house,” Burk said.

Some clients were basically living on overtime pay, Burk said, with no margin for a setback.

The biggest reason homebuyers fall behind is job loss or a major reduction in income, Burk said.

It can take people a long time to find a new job, he said, and unemployment is less than the old paycheck.

The three Housing and Credit Counseling offices, in Lawrence, Manhattan, and Topeka, collectively provided counseling for almost 200 mortgage default clients in 2012, Burk said, and they have counseled 25 such clients to date this year — one ahead of the same point in 2012.

As for clients who were able to qualify for and obtain help from the national mortgage settlement, Burk said he had only one client who was successful.

Recently, the Florida-based Lending Processing Services Inc. and its subsidiaries entered into a smaller foreclosure-related settlement with a group of states, including Kansas. The News was unable to learn from Schmidt’s office details about Kansas’ compensation in the settlement.

The Jan. 18 deadline to submit a claim form has passed, but

National Mortgage Settlement says it is possible that properly filled out

claims “received or submitted online in the next few weeks” will be accepted.

“To maximize the likelihood that your claim form can be accepted,please submit it as quickly as possible,” the website advises.

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