But California is not alone in capriciously deciding the settlement money isn't needed to promote sound financial decisions and to help keep people in their homes. Greedy governors and legislators nationwide are plundering the settlement to hide their budgetary failures.
In Georgia, every cent of the settlement money was pilfered. Not being afflicted with a massive California-style budget deficit, Georgia's legislature used the $99 million received from mortgage servicers for two existing economic development programs. The brunt of mortgage servicers' abuses were in Atlanta --- yet half the money is earmarked for projects in rural Georgia, with the rest sprinkled around the state. Most Georgians victimized by mortgage servicers will get no help at all. In South Carolina, Gov. Nikki Haley attempted to stop the legislature from grabbing the funds for economic development, but her veto was over-ridden.
It's the same story in Missouri, which plans to use its $39.5 million to cover cuts in the state's higher education budget. In my birth state of New Jersey, Gov. Chris Christie intends to pour the whole $72 million straight into the state's general fund.
Not all states are engaging in political "bait and switch." Ohio and Colorado are keeping their promises by dedicating their settlement money to housing-related programs. Other states, including Tennessee and Washington, are keeping a portion for the state coffers, but will spend the rest on programs including foreclosure relief, housing counselors and legal assistance.
For their part, many consumers are refusing to take betrayal lying down. In Arizona, consumer advocacy groups sued the state legislature over its plan to divert half of the state's $97.7 million in settlement money to the general fund. The groups lost the first round, but plan to appeal.
If you're getting that creepy déjà vu feeling, that's because this scenario is nothing new. Many states have treated 1998's $206 billion settlement with tobacco companies as mad money -- a piggy bank they can raid to help balance the budget, as Pennsylvania did this year and Hawaii did a year earlier. "It's really shortsighted when we start using these funds just to balance the budget rather than putting them strategically into prevention programs," said Deborah Zysman, director of the Coalition for a Tobacco-Free Hawaii, in a recent interview.
This kind of myopic thinking is the reason for the economic mess we're in. Seeking to woo Wall Street away from Republicans, Bill Clinton succeeded in leading the charge to repeal the Glass-Steagall Act and deregulating the financial industry -- a decision that ignored 70 years of political wisdom and the greatest lesson of the Great Depression: that banks, investment housesand insurance firms should be separate.
So we got a single mega-bank, where all the pieces of the mortgage puzzle are tucked under one roof. The investment house provides the money to fund thousands of mortgages, bundles those loans, and sells them to investors. The bank's retail operation holds the loan just long enough to sell it. And then there is the loan servicer, which -- ostensibly working on investors' behalf -- has its own perverse incentives for pushing struggling borrowers into foreclosure and jeopardizing the loans.