Exclusive: Legal cloud hangs over use of mortgage settlement money to balance state budget

In the waning moments of the legislative session, the Delaware General Assembly tapped funds from a mortgage lending settlement with major banks.

This came in spite of legal clouds hanging over a similar budget patching move  in California.

The Joint Finance Committee used $31 million from the settlement to plug a hole in a Delaware state budget without resorting to unpopular tax or corporate fee increases in late night deliberations. The budget legislation was  later passed  and signed by Gov. Jack Markell.

Carl Kanefsky, spokesman for the Delaware Attorney General’s office said the JFC did not seek a legal opinion from the office before approving the transfer of funds. Attorney General Matt Denn, in an appearance on the Rick Jensen show on WDEL, said the state is technically  on firmer ground because the money did not have the same restrictions as funds in California.

The governor’s office is looking into the matter, spokesperson Kelly Bachman said. Messages seeking  comment from the Chair of the Joint Finance Committee and other legislators  were not returned.

Housing advocacy groups also remained publicly silent.  Some groups get money from the Legislature and it is possible there is some reluctance to question its financial judgment.

The need for the settlement money is hard to dispute. Delaware has one of the 10 highest foreclosure rates in the nation. Lending practices that led to the settlement with banks have been blamed as a factor in the wave of foreclosures that continue to bedevil the state. Former homeowners have come forward with stories of efforts to hanging on to their homes coming to naught. The situation was part of a series by the News Journal.

Legislators have been struggling with a funding gap that by some accounts could grow to $100 million next year.

In mid-June, a judge in California ruled that using $300 million in funds for non-housing purposes was not a proper use for the proceeds, the New York Times and other media reported at the time.

Plaintiffs in the case told the Times another dozen or so states had taken similar actions and could be exposed to a lawsuit. However, they indicated they would wait for the outcome in California before taking any further action.

So far, there has been little public reaction from housing advocates about the decision to use the funds. The late Attorney General Beau Biden worked with other AG’s to secure the funds, perhaps risking the ire of banks that provide tens of thousands of jobs in the state.

A press release , issued in 2014, from Biden’s office stated that proceeds from a Bank of America settlement would be sued to aid distressed communities affected by the alleged lending violations.  Earlier press releases announcing other settlements  made similar pledges.

Should a similar suit emerge in Delaware and plaintiffs somehow prevail, Delaware would face a much more serious situation than California, which now has a surplus, thanks to tax increases and a surging economy.

Agencies that provide assistance for those who lost their homes to foreclosure had sued California. An attorney involved in the case did not respond to a request for comment.

Attorney General Denn  stated earlier  he was unhappy that his plan to use some of the housing settlement funds in crime-fighting efforts in Wilmington had not been approved by the General Assembly. That would seem to fall within the definition of the press release issued by his predecessor. However, those who have lost homes to foreclosure do not see it that way.

Based on media reports, there has been no sign on whether California will fight the ruling made in a lower court in the state. News of the ruling began to circulate on social media in Delaware over the weekend as some legislators expressed unhappiness with the budget.

A number of Democrats, as well as some Republicans voted against the budget.

Liberal Democrats cited the decision to not tap new revenue sources, such as higher corporate fees. a higher income tax rate for high income families.

Some Republicans objected to the spending increase in the budget. A number of GOP legislators did vote for the budget after Democrats gave ground on changing the prevailing wage that sets pay for state projects and paying a small part of transportation salaries out of the general fund, rather than the Transportation Trust Fund.

There have also been growing objections to the lack of transparency in the budget process that typically features last-minute deals that are  hammered  out as the July 1st deadline approaches.