Three community groups sued Gov. Jerry Brown on Friday, demanding he restore more than $350 million in mortgage settlement funds that were used to plug state budget holes two years ago.
The money — from California's slice of the $25 billion national mortgage settlement with banks in 2012 — was supposed to fund housing counseling and foreclosure relief programs. But with the state facing a $16-billion budget deficit that spring, Brown diverted it to the state's general fund and to pay down interest on housing bonds.
These days, though, state coffers are fat, with California projecting a $5-billion surplus this fiscal year. And so the groups, which work on housing counseling, want Brown to put the money back where it was intended.
"Our goal is a very simple goal," said Robert Gnaizda, general counsel for the National Asian American Coalition, which filed the suit along with COR Community Development Corporation in Irvine and the National Hispanic Christian Leadership Conference. "We want an early settlement that will help 2 million California homeowners who are still in distress."
Gnaizda said the suit was a last resort after several written and verbal requests to the governor's office for a meeting on the topic drew no response.
Brown's office had little to say Friday as well, issuing a statement from H.D. Palmer, deputy director for external affairs, defending the governor's decision.
"While we haven't yet seen the complaint, we're confident that our budget actions are legally sound," he said.
A spokesman declined to discuss the suit further.
Stuck in the middle is California Atty. Gen. Kamala Harris, who played a lead role in the national settlement and criticized Brown in 2012 for diverting the funds. But as the state's chief lawyer, Harris must now defend Brown in the lawsuit. A spokesman for Harris declined comment.
California is hardly the only state that used mortgage settlement money for other purposes. A 2012 study by Enterprise Community Partners, a nonprofit affordable housing group, found that less than half of the $2.5 billion allocated to states in the deal had been used on housing. And there have been disputes elsewhere, including New York, where Gov. Andrew Cuomo and state Atty. Gen. Eric Schneiderman sparred for several months over how to divvy up a settlement with JP Morgan Chase before reaching a deal in January.
Gnaizda and Neil Barofsky, the former Treasury Department inspector general who is representing the plaintiffs in the suit, said they hope this case could provide a template for housing advocates in other states who are seeking more of the settlement money.
"There are perhaps 15 states where this could be done," Gnaizda said. "Each case is a little different, but we suspect we'll be hearing from some of them in the future."
In California, foreclosure rates remain high, but lower than when the settlement was reached in February 2012. More funding for counseling, credit repair and financial literacy could have gone a long way toward helping borrowers recover, said Paul Leonard, California director for the Center for Responsible Lending. The center is not involved in the lawsuit but has criticized Brown's use of the funds.
"That was a big chunk of money," Leonard said.
The loss of funds has had a direct effect on housing counseling agencies and the people they work with, said Kevin Stein, associate director of the California Reinvestment Coalition.
"There are fewer counselors, fewer agencies. That means there are fewer people served," he said. "It has resulted in people losing their homes."
The loss — coupled with declining funding to develop new affordable housing — is making it harder for many Californians to find a decent place to live. Any future mortgage settlements, he said, need to take the whole picture into account.
"There should be significant resources for housing counseling, for affordable housing and for principal-reduction modifications," Stein said. "And we need to ensure that all these are available in the hardest-hit communities in the state."
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