California, like the rest of the country, didn't do nearly as much for distressed property owners after the housing crash as they did for bankers. But California went the extra mile, taking a chunk of available federal assistance money away.

On Monday, Sacramento County Superior Court Judge Timothy Frawley told the state it shouldn't have grabbed $331 million in a federal fund earmarked for victims of the housing crash to balance its budget, and ordered it repaid. The money was California's share of a $25-billion settlement reached in 2012 with the nation's five largest mortgage servicers for helping crash the economy and destroying people's lives.

The state argued at the time that the money was used to salvage the state's economy, which benefited the property owners (or former property owners, as the case may be). The judge didn't buy that argument and allowed the state to keep just a small part of the money that it had used to the fund the Department of Fair Employment Housing.

The $331 million was supposed to be spent on counseling, consumer fraud education and assistance for people trying to save their homes from foreclosure. Wronged property owners were to receive loan modifications and principal reductions to save their homes.

Attorney General Kamala Harris, who helped negotiate the settlement, announced a plan to spend the money in 2012, but that didn't happen. Shortly after the settlement was announced, the governor said he was revising his 2012-13 budget proposal, full of difficult funding cuts, to include the federal dollars while still maintaining a $1.1 billion surplus for future years. 

The homeowners faced a predatory banking industry alone, subject to misinformation and deceitful behavior. The state diverted the entire $369 million from the special fund to the general fund. There are still thousands of homeowners who could benefit from the assistance.

A lawsuit (pdf) to force the state to cough up the money was filed in March 2014 by the National Asian American Coalition, the COR Community Development Corporation and the National Hispanic Christian Leadership Conference. The state was already projecting a large budget surplus by the time the suit was filed but the plaintiffs argued that Governor Brown had “given no indication in his budget that he intends to replenish the diverted funds, now or ever.”

The state did not restore any of the money in the 2014-15 budget and there is no provision for that in the $117.6-billion budget approved by the Assembly and state Senate Monday and sent to the governor. Although the governor and lawmakers are haggling over how much to reduce the multi-billion-dollar budget surplus through increased spending, California's Department of Finance spokesman H.D. Palmer told the San Francisco Chronicle, “While we are in a much better position than we were several years ago, we are precariously balanced.”

Robert Gnaizda, lawyer for the groups that filed the suit, told Reuters, “We would be happy to work with the governor on a distribution schedule.” But it’s not clear the administration is ready to have that discussion. An appeal is still being considered.

–Ken Broder

To Learn More:

Judge: Brown and Legislature Illegally Raided Homeowners Fund (by Bob Egelko, San Francisco Chronicle)

California Has to Repay $331 Million to Homeowners Fund, Court Rules (by Gretchen Morgenson, New York Times)

Judge Rules California Owes $331 Million to Homeowners (by Jim Christie, Reuters)

State Hasn’t Spent $1 Billion in Federal Funds for Housing Crash Victims (by Ken Broder, AllGov California)