Arizonans sue to block mortgage fund raid

PHOENIX — An attorney for two Arizonans at risk of losing their homes asked a judge Thursday to block lawmakers from raiding a special fund designed to help prevent foreclosures.

Tim Hogan of the Center for Law in the Public Interest said the state was given $97 million as part of a nationwide settlement of a mortgage fraud claim against five major lenders. He said the part of the deal signed by Attorney General Tom Horne requires the cash to be put into a special trust fund to be used only for specified purposes.

But the Legislature decided to take $50 million of that to help balance the state budget, a move approved by Gov. Jan Brewer. While Horne expressed displeasure, he never challenged the move.

Now Hogan wants Maricopa County Superior Court Judge Mark Brain to intercede and keep the transfer from taking place.

Brain has not yet set a date for a hearing. But Hogan is confident he can get a ruling by July 1, the day the funds are set to be moved.

Horne said the actions of the Legislature are legal.

The deal announced in February gives Arizona about $1.6 billion of the $26 billion nationwide settlement.

Most of that is earmarked in direct aid for homeowners to help them avoid foreclosure. There also are funds to compensate those who were improperly forced out of their homes.

But it also includes $97 million for the state.

The settlement spells out how those dollars can be used, including “to avoid preventable foreclosures'' and to help prevent and prosecute financial fraud. The paperwork goes on to list examples such as paying for housing counselors, legal assistance and foreclosure assistance hot lines.

Horne initially fought the move by the Republican-controlled Legislature to divert some of the dollars to balance the budget, calling it “bad public policy.'' But he said Thursday the move is not illegal, that the agreement has other permitted uses for the cash.

“One of the provisions is that we can compensate the state for its losses,'' he said. “And the position of the state is that, due to the recession that resulted from the mortgage crisis, they've lost 30 percent of their revenues, which is billion of dollars. Fifty million is a tiny fraction of what they've lost.''

Hogan, however, said that ignores the fact that the agreement Horne signed — the one approved by a judge — puts the money into a specific trust fund. More to the point, he said, it makes Horne legally responsible for ensuring the cash is spent as required.

“I don't see how as trustee he can possibly justify putting $50 million in the general fund without any proof that the state has any ‘costs resulting from the alleged unlawful conduct of the defendant banks,'” Hogan said, quoting from the agreement.

“That refers to the cost of prosecution (of financial fraud) and things like that, not general economic harm from the housing crisis.” Hogan said he has a legal duty to make sure the $50 million the Legislature demanded represents “verified costs.''

“Otherwise, he could just dump the entire amount in the general fund,'' Hogan said.

Horne disagreed. He said all that the agreement requires is that there be a financial connection.

“There's no doubt that the recession was caused by the mortgage crisis. And there's no doubt that the recession caused the state to lose 30 percent of its revenues.''

Horne said it does not matter if there were other causes of the recession, or if the five lenders were only partly responsible. “It doesn't have to be the only factor.”

Hogan brought the lawsuit in the names of two people who would benefit by the state having more money to help homeowners avoid foreclosure: Joseph Morones of Mesa and Elvira Hernandez of Chandler. The lawsuit said both are currently “at risk'' of losing their homes.

But the legal papers cite broader implications of losing the cash.

In an attached affidavit, Valerie Iverson, executive director of the Arizona Housing Alliance, said $97 million “could help tens of thousands of distressed homeowners'' through the kinds of counseling, legal help, education and mediation services that were envisioned in setting up the trust fund.

“Without this funding most distressed homeowners will never know about the resources that are available to them and that they are entitled to receive,'' she wrote.

“Without this funding, distressed homeowners will have to go up against the five largest banks and other institutions and their bureaucracies on their own, without the help and expertise of housing counselors, mediators and lawyers. Without such information and assistance, we have seen large numbers of foreclosures that could have been avoided.''