California Gov. Jerry Brown (D) raided the state’s national mortgage settlement fund to pay down debt when the state was facing a budget deficit in 2012. (Jae C. Hong/AP)

Housing groups sue California governor for $350 million in settlement funds

A coalition of community organizations filed a lawsuit Friday demanding that California Gov. Jerry Brown return $350 million in funds diverted from the state’s share of the national mortgage settlement.

California received $12 billion of a $25 billion agreement to help struggling homeowners through reductions in the principal or interest on their mortgages. When the state was facing a budget deficit in May 2012, Brown (D) raided the fund to pay down debt issued to build homeless shelters and affordable housing, among other things. Now that California is projecting a $4.2 billion surplus this year, community groups say, the money should be returned.

“We’re just really tired and feeling helpless in trying to help homeowners,” said Faith Bautista, president of the National Asian American Coalition (NACA), a housing advocacy group and one of the three plaintiffs in the lawsuit. “We’re grossly underfunded, and homeowners still really need help. It’s sad to have this money that was meant to help taken away.”

The National Hispanic Christian Leadership Council and COR Community Development Corp. are also part of the suit. Neil Barofsky, a partner at Jenner & Block and the former special inspector general for the Troubled Asset Relief Program, is lead counsel for the complaint.

They claim that Brown, along with John Chiang, the state’s controller, and Michael Cohen, its director of finance had no right to divert the money. California law bars officials from moving money from “special funds” if it interferes with the intended use, according to the complaint filed in Sacramento.

“We told the governor in the spring of 2012 that what he was doing was illegal, but I didn’t want to bring a suit while the state was facing such a huge deficit,” said Robert Gnaizda, general counsel for NACA.Gnaizda said he wrote and called the governor’s office three times to discuss the return of the funds, but never received a reply.

“All of the plaintiffs have admiration for the governor because he’s been a great friend to the black community, Latino community and Asian Americans in California,” Gnaizda said. “They want to meet with the governor and convince him to settle quickly, rather than prolong this.”

Officials in the governor’s office directed questions to the California Department of Finance. Spokesman H.D. Palmer said, “While we haven’t yet seen the complaint, we’re confident that our budget actions are legally sound.”

The money came from a settlement with the nation’s five largest mortgage servicers: JPMorgan Chase, Wells Fargo, Bank of America, Citigroup and Ally Financial. Prosecutors accused them of using forged and shoddy paperwork to foreclose on struggling homeowners, a practice known as “robo-signing.”

Although the number of foreclosures in California have tumbled in recent years, the rates are still high. In February, more than 5,800 homeowners in the state received a notice of default, the first stage of the foreclosure process. That was down 9.2 percent from January and about 3 percent from a year ago, according to RealtyTrac, a real estate information company.

In the spring of 2012, California Attorney General Kamala Harris denounced Brown’s decision to siphon millions from the settlement to plug holes in California’s budget. Now she is being placed in the awkward position of having to defend the governor as his attorney general. Harris, who declined to comment, may have to recuse herself because of the glaring conflict of interest.

Brown is not the only governor to dip into the mortgage settlement to cover budget gaps. At least half of the 49 states involved in the deal have used the housing funds for other needs, according to a study by Enterprise Community Partners, an affordable-housing group.