In a decision delivered last month, Sacramento County Superior Court Judge Timothy Frawley ruled Gov. Jerry Brown and the state Legislature acted unlawfully in diverting more than $331 million out of $410.6 million in mortgage settlement funds that were intended to help homeowners struggling with foreclosures.
The $410.6 million was part of a $25 billion nationwide settlement with the country’s largest banks over mortgage servicing improprieties.
Instead the money was used to help the state deal with its budget crisis and was diverted to offset state expenses for housing bond debt service as well as to support the Department of Justice and the Department of Fair Employment and Housing.
Despite the court’s ruling, the judge noted that he lacked the authority to order the state to repay the money because of the state government’s separation of powers.
“The court shall assume that the Legislature and respondents will take whatever steps are necessary and appropriate to meet this obligation,” Frawley wrote in his preliminary June 12 ruling.
The judge is considering motions before signing his decision and it’s not clear when it may be finalized.
The lawsuit against the state was brought last year by three nonprofit groups that offer counseling to homeowners.
The three plaintiffs were the National Asian American Coalition, the COR Community Development Corporation and the National Hispanic Christian Leadership Conference.
The groups say the money should have been distributed to an estimated 800,000 homeowners affected by the foreclosure crisis. The homeowners could have used the money for things such as helping get loan modifications, restoring credit scores, buying new homes or paying for moving.
Attorney Neil M. Barofsky, who is with the firm of Jenner & Block in New York, filed the lawsuit on behalf of the three plaintiffs. He is the former inspector general for the federal bank bailout.
In an email, Barofsky said if the state follows the order, the money will be put back into the Special Deposit Fund to be spent for the purposes it was originally intended.
Contacted on Monday, Gov. Brown’s office was nonspecific in what action they plan to take in reaction to the judge’s ruling other than to say that they continue to consider next steps.
The law firm of Remcho, Johansen & Purcell is representing the Governor and Director of Finance in this matter.