Back From the Vomitorium: The Looting of the Mortgage Settlement Agreement

Oct. 28, 2012 -- States are looting the Mortgage Settlement Fund, and the odds are good that you or someone you know is getting robbed -- for the second time.

According to recent reports, politicians, not bankers, are the culprits this time around -- siphoning billions from that historic settlement and pumping it into their broken state budgets. Instead of "manning up" and changing their diet, they're taking a cue from ancient Rome: After a quick trip to the vomitorium, it's back to the banquet table. (Care for a mint?)

Their willingness to play fast and loose with the settlement -- crawling through certain wiggle words in its language to circumvent the clear intent of its negotiators --- tells me they still haven't learned where "fast and loose" leads. Ironically, some of the worst offenders are the governors of states that originally led the fight to win justice for consumers -- with California Gov. Jerry Brown leading the charge.

Remember the settlement -- the $25 billion that America's five largest mortgage servicers paid out to atone for fleecing millions of American homeowners? Wells Fargo, Bank of America, JPMorgan Chase, Ally Financial and Citigroup were held accountable for fraudulent foreclosure practices -- including the notorious practice dubbed "robo-signing" -- that cost millions of Americans their homes. The idea was not just to punish the banks (and the jury is out on exactly how much this really does punish them), but to help beleaguered homeowners as well as raise the level of consumer financial awareness in this country so 2008 would never be repeated.

"This is neither the beginning nor the end of our work to hold banks and other institutions accountable for the destruction they've caused families, communities and country," said Illinois Attorney General Lisa Madigan when the deal was announced. "Today's settlement should serve as a warning."

The settlement set aside more than $2 billion for the 49 participating states and the District of Columbia -- money that was supposed to help prevent foreclosures with programs like down payment assistance, foreclosure counseling and financial literacy training.

Unfortunately (perhaps predictably), as the money reached the states, the wheels went off the tracks. In California, Attorney General Kamala Harris exulted about the good the settlement would do for people in her state, hard-hit by the foreclosure crisis. "Hundreds of thousands of California homeowners will benefit," said Harris, as her office took steps to "ensure the settling banks deliver on their promises."

The state AG's gaveth and just like that, the state Governors tooketh away! Over Harris's strenuous objections, California Governor Jerry Brown took every penny of the state's $410.5 million in settlement money -- even though applying that sum to California's hemorrhaging $15.7 billion budget deficit is like putting a Band-Aid on a gunshot wound.

Brown's ethical lapse is more ironic -- and ill-conceived -- given that one major source of the state's budget woes is the economic fallout caused by the decimation of millions of Californians who were lured into buying (or irresponsibly raced to buy) homes they could ill afford. To take money from consumer protection and education programs to fill a one-time hole in the state budget is, of course, preposterous.

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.

Each cog in this vast machine works to maximize short-term profit -- and reduce long-term risk... and responsibility. That's why the megabanks, greased by a national policy to foster home ownership, threw underwriting rules out the window in the mid-2000s and started lending money to almost anyone who could fog a mirror. They were far less interested in whether those loans succeeded or failed, because they made their money on volume, not performance.

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Hence, the crash. Hence, the "Settlement." Hence, this latest outrage. The mistake many states are making is, in principle, precisely the same: taking the easy money, going for the quick fix to balance the books. Let blighted neighborhoods stay blighted. Let victimized homeowners fend for themselves.

It's time we reject this sort of short-term thinking and get serious about long-term solutions. That means punishing those who treat American homeowners' finances like a piggy bank to be raided at will. It is totally indefensible that any governor would feel justified in plugging an "unpluggable" budget hole with funds that could be dedicated to assuring 2008 never happens again.

If you've been hurt by your mortgage servicer, this is your money and your future. Whether you choose the courts or the ballot box, I urge you to -- as we say in New Jersey -- "do what you gotta do."

Adam Levin is chairman and cofounder of Credit.com and Identity Theft 911. His experience as former director of the New Jersey Division of Consumer Affairs gives him unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity theft and credit.