After the California Supreme Court refused in July to hear the appeal of Gov. Gavin Newsom’s administration, it is now clear that the State of California must use proceeds awarded in a lawsuit to aid California homeowners adversely affected by the mortgage crisis of the last decade. The state’s highest court reaffirmed the order of a California appeals court to repay the proceeds, which total $331 million.
In 2012, California and 49 states agreed to a settlement with the five largest U.S. mortgage servicers: Ally (formerly known as GMAC), Bank of America, Citigroup, J.P. Morgan Chase, and Wells Fargo. The lawsuit contained countless allegations of federal law violations and was settled with $20 billion paid to homeowners affected by the mortgage crisis. The states also received a total of $2.5 billion.
Newsom’s administration disputed lower court rulings that found California mistakenly used a portion of the $410 million it received in the settlement and diverted $331 million to state budget costs. The California Supreme Court also rejected the administration’s argument that it could use the money for purposes other than benefitting homeowners, such as balancing the state budget.
California used the money to pay off housing bonds; some enacted a decade before the mortgage settlement. The state paid three years of state budget expenses by a portion of the proceeds California received from the 2012 mortgage settlement.
Former Gov. Jerry Brown made the decision and, with the help of legislators, formulated the plan to use the money for fiscal purposes. The California Assembly even enacted legislation seeking to block a court ruling to repay the $331 million. At the end of the 2018 legislative session, Brown and lawmakers sponsored a bill stating that the money was used correctly, and the enacted law sought to give the Legislature the power to “abrogate” (revoke) the appeals court order.
However, supporters of the Supreme Court ruling say the money should have been used to fund and supplement basic government services related to housing. This includes down payment assistance to former homeowners who experienced a foreclosure during the housing crisis and would again like to own a home. The money could have also been used to fund programs providing financial literacy education and assisting buyers with low credit scores.
Gov. Gavin Newsom’s administration announced that it would immediately begin transferring the $331 million back into a special fund created to assist California homeowners badly affected by the mortgage crisis. “Now that the Supreme Court has issued its decision in this matter, we will move forward to implement the ruling,” said H.D. Palmer, a spokesman for the California Department of Finance.
Neil Barofsky, an attorney who represented those who contested the diversion of funds, said it was disappointing that state officials spent so many years on appeals. “We understand it was a desperate time for the state when this happened,” he said. “But once we returned to surpluses, the idea that they would just keep fighting this has been breathtaking.” Because of the budgetary surpluses mentioned by Barofsky, California should be able to repay the money without much delay or difficulty.
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