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San Francisco Chronicle: California can’t divert mortgage relief funds to pay off state debt

Court says state must use $331 million to help homeowners

In a former job, Neil Barofsky’s title was SIGTARP – the Special Inspector General overseeing the Troubled Assets Relief Program. He was one of the most feared men on Wall Street, appointed by President George W. Bush in 2008 to monitor the $700 billion bailout of some of the nation’s largest banks.

Now, Barofsky is back making headlines, although this time as a lawyer in private practice. According to a story in the San Francisco Chronicle, a California appeals court this week sided with Barofsky to force the state to use $331 million of funds it received six years ago in the $25 billion National Mortgage Settlement for the purpose intended: helping troubled homeowners. The banks in the settlement were some of the same Barofsky had overseen as SIGTARP: Bank of America, Wells Fargo, Citigroup, JPMorgan Chase and GMAC.

California took the money from the 2012 settlement and, instead of distributing it for mortgage relief, used it to balance the state’s financial ledgers. Some of funds paid off state housing bonds as well as debts owed by state agencies that handle the bonds, according to the Chronicle story.

“We hope the governor doesn’t continue to waste taxpayers’ money,” Barofsky, now an attorney with Jenner & Block LLP, told the Chronicle. “$331 million can help an awful lot of homeowners.”

This is the second go-round for the court’s mortgage-relief decision. In July, the same court in Sacramento, the state’s capital, issued a similar order: the funds must be used to aid foreclosure victims. In response, state lawmakers rewrote budget-related legislation to try to make the redirection of the money legal, and Gov. Jerry Brown signed it. This week’s court ruling said the legislative work-around was a no-go.

“Money was unlawfully diverted from a special fund in contravention of the purposes for which that special fund was established,” the appeals court said in its 3-0 decision.

Gov. Gavin Newsom, Brown’s successor, is deciding whether to comply with the ruling or take the case to the state Supreme Court, according to the Chronicle.

“Nice try, Sacramento, but the rules don’t work that way when it comes to diverting public money to ease bureaucratic pain,” the Chronicle’s Editorial Board said in an opinion piece, referring to state’s capital city.


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