No Surprise – Arizona Court Rules Mortgage Settlement Funds Don’t Have to Help Homeowners

The National Mortgage Settlement with the five largest banks was to provide $26 billion in various kinds of assistance to the country’s homeowners in an effort to mitigate the damage caused by the foreclosure crisis.  Of that amount, Arizona’s share was roughly $1.6 billion.

The ink was barely dry on the settlement agreement, and the Arizona legislature wasted no time sweeping $50 million of that money into the general funds to help balance the state’s budget deficit.  And frankly, when it happened I couldn’t have been less surprised.

Predictably, homeowner advocacy groups were outraged, and they turned to the courts.  Their position was obvious… the money was specifically to help homeowners who were the victims of mortgage fraud.

Truth be told, the other side didn’t disagree, but the case went forward anyway and now Maricopa County Superior Court Judge Mark Brain has ruled that the legislature did nothing wrong.

Judge Brian agreed that the settlement signed by Arizona’s Attorney General Tom Horne did state clearly how the funds were to be used, including, for the avoidance of preventable foreclosures, and for efforts designed to prevent and prosecute financial fraud.  He also said that the agreement required the money be put into a “court ordered trust fund.”

I wasn’t the least bit surprised to hear today that even so, the judge ruled that none of that made the money out of reach of the state’s lawmakers. 

And another non-surprise… homeowner advocates, represented by attorney Tim Hogan of the Arizona Center for Law in the Public Interest has said they’ll likely appeal the ruling.

Assuming that appeal gets filed, the next thing that should surprise no one will be them losing again.  And after that, I suppose the state’s Supreme Court could fail to surprise me by ruling against them once more.

Is anyone over the age of two surprised by anything I’m saying here?

How it all breaks down…

The lion’s share of the $1.6 billion due Arizona is to directly help those with “underwater” mortgages, but that’s not cash payments, right?   That’s $1.3 billion that will be “paid” in the form of principal reductions that will go to those with loans deemed to qualify by servicers, which means it all comes down to who the investor is.  And Fannie and Freddie loans, at least 60 percent of all loans, don’t participate in the settlement as far as principal reductions are concerned.

Another $110 million is to compensate people who lost homes involving some sort of misconduct in the process between 2008 and the end of 2011.  Checks for homeowners are supposed to be an awe-inspiring $1,500 to $2,000 each.  And $85 million is supposed to go towards refinancing the same loans we refinanced last year to lower rates.

This fight in Arizona is about $97 million that was to go to the state itself in order to fund efforts related to foreclosure prevention and mortgage fraud, but the state legislature grabbed $50 million of it for the general fund.

The state’s obvious argument…

The state argued what I would have expected them to argue… that the state itself was also a victim of the foreclosure crisis and therefore was entitled to some of the settlement funds.  And aren’t they right about that?

I mean, unquestionably the state’s tax revenues have been significantly reduced as a result of the crisis.  At the very least, property taxes are lower, of course, and so are sales taxes, as a result of reduced consumer spending.

So, yes… I would have to agree that states have suffered as a result of foreclosures… the only thing that surprised me was that the legislature only took $50 million of the settlement funds.  I wouldn’t have been surprised had they taken the entire $97 million for the state as a whole.

And would it really matter one way or the other if they had?  Why would anyone think so?  What evidence exists that would lead anyone to believe that the money would or even could be better used elsewhere?

According to a story in the “The Sierra Vista Herald,” groups like the Arizona Housing Alliance brought the suit, and Valerie Iverson, that group’s executive director, has said that, “the money could be better used for counseling, legal help and education of homeowners in trouble with their mortgages.”

Really?  Well, since early in 2010, Arizona has had $267,766,006, which it received from the federal government as one of the “Hardest Hit States.”  So, that’s almost three years having over $267 million to fund programs to help mitigate the damage caused by foreclosures.  So, how’s that going so far, Arizona?

Well, as of August 2011, a year and eight months after Arizona received the federal funds, essentially nothing had been accomplished.  But the good news, if you can call it that, is that almost none of the money had been spent.

According to the Phoenix Business Journal…

Arizona has dispensed only about $3.5 million of those funds since the program began in September 2010, said Mike Trailor, director of the Arizona Department of Housing, which oversees the “Save Our Home Arizona” program.

“There is no question about the depth of the crisis, but we totally underestimated the wall we were going to face,” he (Trailor) said.

The housing programs vary state by state.  Arizona’s version focuses on principal reductions, second mortgage settlements and temporary unemployment assistance.

The program falls short on all levels. Only 78 applications out of 829 have received funding so far.  Of those, only three were principal reductions.  National Bank of Arizona and Bank of America Corp. are the only banks that have participated in the program to date.

Trailor said he is concerned that even with all of the state’s efforts to keep people in their homes, short sales will be the most effective way to deal with the problem.

While short sales displace the homeowner, the home doesn’t end up vacant, he said.

“There is no clear answer to this all,” he said. “The challenge is to properly invest the funds while we are in the middle of the crisis — not when it’s over.”

And where is Arizona’s “Save Our Home Arizona” program now in terms of results?  Well, it’s not easy to find information on how well the program is doing, that’s for sure.  It’s not like there are any press releases out there bragging about its success.  But, if you look on the Arizona Department of Housing site, you can find the program’s quarterly reports.

Here’s what the program’s results look like as of the end of the second quarter of this year, 2012…

AZ Hardest Hit Fund Program Report Q2 – 2012

Woohoo!  Now three’s a program worth funding… NEVER.  I’ve heard that Mr. Trailor is a decent guy, but I have to tell you that if I was ever in charge of $267 million to address a crisis… there is no chance that three years later I wouldn’t have any idea where to spend the money.  I would have tried something.  Maybe I would have failed… but damn it, I would have tried.

To me, Arizona’s Save Our Home program looks like an autistic child fixated on one toy and screaming its head off any time someone tries to change its focus to something new.  Blaming this program’s failure on the banks or whatever was fine the first year, but after that you’re supposed to make changes in an effort to correct your course.  Holding onto a failed strategy or plan for three years while people suffer all around you is unforgivable.

And that’s all I have to say about that.

No surprises all around…

Okay, so what’s the big deal whether the state uses some of the funds to balance the state’s budget?  It’s better than the alternative, which is the legislature cutting much needed assistance programs and raising taxes across the board… right?

And it’s not like the $267 billion the state has had for almost three years was spent effectively… or even spent at all… on foreclosure prevention.

Besides… I’ve talked to hundreds upon hundreds of Arizona’s homeowners at risk of foreclosure and never once has anyone so much as mentioned a need for housing counselors, legal assistance or foreclosure assistance hotlines.

Hogan argued that the agreement doesn’t specify that the money can be used for balancing the state’s budget, stating that, “nothing in the agreement covers the kind of ‘losses’ the Legislature is claiming,” but the judge wasn’t going to quibble over such details in the face of the state’s legislature’s bigger picture argument.  Like I said, it’s impossible to argue that the state isn’t one of the victims of the crisis.

Hogan also made the argument that the settlement required the money be placed into “a separate court ordered trust fund,” which he said should place the funds out of the legislature’s reach.

The judge, however, didn’t but that either.  He agreed that the agreement mentions a “trust fund,” but he didn’t think that language sufficient to imply that the restrictions that accompany the kind of charitable trust recognized under Arizona state law apply.

All of which was equally unsurprising.

There is ONE surprising part of all this…

I’ll tell you what is surprising about this subject, in Arizona and elsewhere.

Well, it’s surprising that anyone is buying into the whole “housing has hit bottom,” campaign being waged by the trade associations made up of real estate agents and mortgage brokers.  Of course it hasn’t… why would it have?  What’s changed that would cause the housing market to change?

Oh, it may very well be that the bottom of Arizona’s housing market has come close to being at the bottom, but that’s because the bottom is way down there.  But I assure you that other segments of the housing market will continue to fall going forward, because nothing fundamental has changed and assets don’t just magically re-inflate.  Prices only rise as a result of demand, and nothing has changed in terms of demand for residential real estate.

At least 60 percent of Arizona homeowners are still underwater, so that says reduced demand all by itself.  Sixty percent of homeowners can’t move even if they wanted to, and even those who aren’t yet underwater aren’t in any hurry to list their homes for sale, unless of course their at the age when downsizing isn’t optional.

And loans are still very hard to qualify for, to say nothing of the 20-30 percent down payment requirements imposed by Fannie and Freddie.  Even FHA is tightening its lending standards in the face of it experiencing near 20 percent defaults on loans originated since 2009.

Baby boomers are still aging, right?  And student loan debt is still causing graduates to delay family formation last I heard.  And unemployment?  Well, don’t even get me started… U6 unemployment hasn’t changed one bit.  All of the demographic trends that were true yesterday are still true today… and will still be true tomorrow… until something changes.

And I’m sorry, but that something isn’t $50 million worth of housing counselors, legal aid, foreclosure assistance hotlines or homeowner education.

Arizona state budget cuts to-date…

According to the Center on Budget and Policy Priorities, last year, an estimated 8,200 families in Arizona lost their eligibility for temporary cash assistance, and the time limit for that assistance was cut to 36 months from 60.

Arizona was also forced to eliminate preschool for 4,328 children, funding that provided additional support to disadvantaged children – preschool to third grade, and funding for books, computers, and other classroom supplies.  And that’s not all, the state also cut by half the funding for kindergarten, leaving parents with the cost of keeping children in school beyond a half-day schedule.

Balancing the state budget is actually much more important than $50 million worth of housing counselors, legal aid, foreclosure assistance hotlines or homeowner education, because the types of assistance programs that would have to be cut without the $50 million would be those that keep people at the bottom of the socio-economic scale fed… and clothed… and able to get child care so they can work… and able to receive a quality education… and yes… in some cases even alive.

So, go ahead Arizona housing advocates… if it makes you feel like you’re doing something, keep fighting the state legislature over scraps of funding that no one has the foggiest idea what to do with anyway.  You’ll lose anyway.

But I’d just like to remind you of the truth of the matter… when it comes to our housing markets, we simply don’t need more of the same failed policy and program nonsense that we’ve all seen do NOTHING over the last four years.

And that shouldn’t surprise anyone.

Mandelman out.