State legislators and Gov. Nathan Deal will spend $104 million of the $815 million banks are paying Georgia to settle foreclosure fraud claims, but if past indications hold true, much of that money won’t be going to distressed homeowners.
The discretionary cash will likely be spent on other areas of the state budget, as is money from Georgia’s settlement with tobacco companies and millions of dollars in directed fees that Georgians pay yearly.
Advocates for defrauded homeowners, neighborhoods crowded with foreclosures and the home-building industry are calling on legislators to use the windfall for its intended purpose: helping victims of fraud.
“It is both the right thing to do and the smart thing to do, because it is about the recovery of the Georgia economy,” said John O’Callaghan, CEO of Atlanta Neighborhood Development Partnership, a nonprofit focused on helping people in foreclosure trouble.
“The governor is open to considering the suggested uses of the [foreclosure] money, said Deal spokesman Brian Robinson. “But we have to weigh those against the needs for teachers, law enforcement officers and building transportation infrastructure.”
Georgia has been among the top five states in number of foreclosures and metro Atlanta average home sales prices hit a 14-year low in December. The dropping values have made Georgia a leader in underwater mortgages. One estimate says one in three Georgia homeowners owe more on their homes than the home is now worth.
“That much money could help many families regain or stay in their homes and could stabilize neighborhoods heavily impacted by foreclosures,” O’Callaghan said.
But Gov. Deal, who sets the agenda for the state budget, is not committed to that.
“The state constitution requires that the money go into the state treasury. The governor would prefer that it go from there to the rainy day fund,” said Robinson said.
The rainy day fund is state savings to cover emergencies and hard times. It helps Georgia keep its high bond rating, which saves the state tens of millions of dollars in interest on loans. Legislators used the fund during the recession, shrinking it from $1.5 billion in 2008 to $116 million last year. Under Deal, it has risen back to about $320 million.
Handling a windfall
This isn’t the first time Georgia has gotten a windfall from a legal settlement. June Deen, the Southeast regional vice president for public affairs at the American Lung Association, saw tobacco money siphoned to programs having nothing to do with the intentions of that settlement and offered advice for victims of foreclosure fraud.
“I would tell them to be very vigilant” and to contact their legislators, she said. “They are going to have to work hard to make their case. If this is put in the general fund, well, there is a lot of competing needs and interest for that money.”
The $815 million foreclosure fraud windfall came after a committee of state attorneys general worked out a national settlement with five large mortgage servicers. Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial (formerly GMAC) violated state and federal laws through deceptive practices, filed improper documents in bankruptcy court and submitted falsified documents in foreclosures, according to the committee.
Attorneys general not on the committee, such as Georgia’s Sam Olens, had the option to accept the settlement or turn it down and pursue their own claims. Olens accepted. The money is expected to arrive after a federal judge signs off on the agreement, which could happen before summer.
More than $700 million of the money coming to Georgia will be handled through the banks and government overseers and will be used to refinance loans, write down principal and make payments to the defrauded. But the agreement also sends money directly to the state governments, $104 million for Georgia, so the states can initiate their own programs.
“We are told by the executive committee that the purpose of the grant to the states was to give states the flexibility to do what they think [is] best,” said Nels Peterson, Olens’ counsel for legal policy.
Olens noted the settlement money is intended to ameliorate the effects of the foreclosure crisis, such as helping people avoid foreclosure, funding housing counselors, paying for anti-blight projects, stepping up consumer protection and prosecuting the fraudsters.
“There is, however, no legal requirement that the funds be spent for any particular purpose,” Olens wrote. “Georgia law leaves that to the appropriating authority.”
Georgia’s spending authority starts with the governor, who presents a budget to the Legislature, which makes changes to it through a series of budgetary committees. A vote by the state House sets the budget.
Targeted dollars, broad use
Money intended for specific uses often gets rerouted by state lawmakers.
For example, Georgia got $1.5 billion from the tobacco settlement in 2001, to be paid over 25 years. Georgia got $138.4 million this year , according to the state budget. Like the foreclosure fraud case, the reason for the settlement was to ameliorate damage done to Georgians’ health and state payments to cover health costs and to help affected tobacco growers. But the money has been spread across state programs.
This year, $7.6 million of the tobacco fund goes to the Department of Economic Development, $6.1 million to the Department of Human Services, which handles programs such as child welfare and daycare licensing, $12 million to the Department of Public Health, which pays for epidemiology and other programs, and more than $100 million will be spent on Medicaid. Other years, the money has helped pay for 911 services, broadband communications and technical colleges.
Tim Sweeney, the director of health policy at the Georgia Budget & Policy Institute, notes the bulk of the money goes to providing health care, some of which is linked to smoking-related diseases. However, only a small percentage of the funds in this year’s budget — $2.5 million for a smoking cessation program and $5 million to cancer research — goes directly to tobacco-related issues.
Legislators also redirect fees Georgians pay to fund specific programs, such as the 75 cents per ton tipping fee at landfills marked for cleanup. It has generated an estimated $140.5 million since 2004, but only 40 percent of the money — $56.5 million — has been spent as directed, according to state numbers. Other programs got $84 million generated by the tipping fee.
Rep. Jay Powell, R-Camilla, introduced House Bill 811 to try to force Georgia to spend five designated fees where intended. It passed the House and is in a Senate committee, waiting further review as the Legislature winds down.
“It’s a trust issue, since if you say you are going to collect fees for a certain purpose then you should spend them there,” he said.
Powell recognizes the realities of the recession and said it would have been difficult for Georgia to balance its shrinking budget over the last few years without some of the shifts.
When asked if there were some way to ensure foreclosure fraud money gets back to victims, Rep. Wendell Willard, R-Sandy Springs, said the answer lies elsewhere.
“That starts with the governor’s office, as to how they are going to design that,” Willard said.
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