Important Suit to Stop Diversion of Foreclosure Relief Funds for Other Purposes

A foreclosure sale sign sits in front of a house in Miami BeachPeterborough    Three California-based nonprofits, the National Asian American Coalition, COR Community Development Corporation, and the National Hispanic Christian Leadership Coalition sued Governor Jerry Brown and his team in California demanding replacement of $369 million obtained for the state for mortgage foreclosure relief and diverted to pay for state debts.  The suit alleges that according to the New York Times that, “Under California law… money placed in a so-called special deposit fund …can be transferred to the state’s general fund only “if the transfer does not interfere with the object for which the special fund was created and the transferred amount is repaid when feasible.” 

            California is certainly not all by its lonesome in diverting the funds from this multi-billion dollar foreclosure relief.  Gretchen Morgenson also cites a report “by Enterprise Community Partners, a nonprofit organization that promotes affordable housing …that half of the 49 states in the settlement had used about $1 billion of the homeowner counseling money for other purposes, like putting it into their general funds or toward non-housing needs.”  Some are claiming that California used the monies to pay down debt from building low income housing, but, frankly, that’s also not the same as foreclosure relief is it?   This whole gubernatorial diversion scheme is troubling and largely smells like a state slush fund at the whim of governors and legislators unwilling to be accountable.  We’ve previously beat the drums about how little of the tobacco settlement money paid by the state actually goes to health programs of any kind or to any sort of smoking abatement programs, and this mortgage relief money wink-and-nod reeks of the same thing.

At the same time this suit is intriguing because there seem to be multiple back stories.  The three nonprofits are smaller, largely unknown players in the long running foreclosure relief battles over recent years and seem to have longer names than their footprints in home buyer counseling and similar endeavors, which made me head scratch a bit, but seeing a picture of Robert Gnaizda, acting as their general counsel, made me start to put two and two together.  Gnaizda’s quote in the paper was peculiar since it was less “advocate” than “insider” in talking about the groups having told the governor they opposed the move but held the suit during the state’s financial crisis until Governor Brown started touting a $10 billion surplus by the end of his second term.  For most organizations fighting for relief in the foreclosure wars, it was either wrong or it wasn’t, and California’s decision to divert funds intended for homeowner relief would have had nothing to do with how much money might have been in their wallets when families were being thrown out on the street, and this money was intended to help them.

But Gnaizda has long been an interesting voice on the California scene, both as a scourge of many of institutions with countless lawsuits dating back to his time directing California Rural Legal Services on to his more recent decades driving the Bay Area-based Greenlining Institute.  At the same time he has been a well-connected California political and establishment figure whether as part of first Brown Administration in several positions or through his constant shoulder rubbing with other big time lawyers and their clients on either side of the table.  He knows his way around the state, both inside and out.  He could be difficult to deal with though and never bridled at attacking other organizations, including ACORN, on our various national banking settlements, based on what he perceived to be California’s special interests and pleadings.  I don’t know the story of his retirement from the Greenlining Institute, but he now claims a role as general counsel for many of the same kinds of CDCs and other groups, similar to the Greenlining Institute’s own coalition of sorts.  I wonder if he was looking for a different platform for his own particular brand of legal advocacy.  Certainly, the Greenlining Institute and the National Asian American Coalition have been publicly linked together on other issues, including the call to eliminate the mortgage income tax deduction, which I heartily agree desperately needs reform. 

With Gnaizda pulling the strings behind this suit it’s certainly serious and not going away, which is promising for whatever reason.  Another interesting tidbit involving this litigation is the fact that they were able to recruit Neil Barofsky, a partner at Jenner & Block and a former special inspector general for the federal Troubled Asset Relief Program.   Barofsky is a hero in the fight for just foreclosure modifications for his argument that a problem in the TARP program was the lack of action on foreclosures and the way the Treasury Department toadied to the big banks and allowed them to make a mockery of any pretense of mortgage modifications.

This suit will never see a trial, I would bet, because it spells deal and settlement in big letters all over the front of it.  Gnaizda and his allies have certainly positioned this matter in every way possible from timing to avoiding all of us rowdies to picking the lawyer to front the case for a big time political deal and a quick settlement, and I’m rooting for them to set a precedent in trying to stop this kind of hijacking of money won for just cause being diverted to separate and unrelated pockets.

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