The State That Ate the National Mortgage Settlement

With an enormous population, a vast landscape dotted with vacant homes, and the charred remains of the U.S. subprime lending industry, California sustained more damage from the foreclosure crisis than any other state.

So it only seemed right that Californians should receive the largest portion of the roughly $20 billion that the five biggest mortgage servicers agreed in February to provide to homeowners in 49 states, in order to settle claims related to alleged abuses of consumers.

Ten months later, though, it is becoming apparent just what an oversized piece of the pie the Golden State got. Through Sept. 30, California homeowners received nearly 41% of the nationwide pot, which is billions of dollars more than an analysis of nationwide mortgage data suggests is fair. In addition, California's hefty share of the proceeds may have come at the expense of other deserving states.

One of the have-not states is Ohio, where Rust Belt housing woes have been overshadowed by the larger real-estate problems of the Sun Belt. Ohioans, who make up 3.7% of the U.S. population and have suffered 3.2% of the nation's foreclosure starts, have received less than 1% of the consumer relief dollars under the multistate settlement.

"I certainly think it's problematic," said David Rothstein, who studies the foreclosure crisis for Policy Matters Ohio, a left-leaning policy research organization. "I don't think that people really anticipated that certain states would have that much larger a percentage of homeowners being helped."

California's windfall is a by-product of a side deal that the state's attorney general, Kamala Harris, cut with Bank of America, JPMorgan Chase and Wells Fargo, using her leverage as the top prosecutor in the nation's largest state to extract as much money as possible. The state also won tough provisions to enforce and monitor the deal, giving its homeowners another leg up over other Americans who are also seeking funds.

Michael Troncoso, senior counsel to Attorney General Harris, argued that California deserves a large share of the pie because it was "one of the hardest hit states in the country by any metric."

Like others who helped negotiate the nationwide settlement, Troncoso also believes that the total settlement amount would have been smaller for all states if California had not signed on to the agreement.

"I don't think it's fair to say that this came at the expense of other states," he said. "It's difficult to have a multibillion-dollar national settlement without the largest state."

Florida and Nevada, also among the most severely affected states, followed California's lead in striking side deals that guaranteed them sizable cuts of the funds, though not their shares are as not generous as California's is.

Other states that had less leverage, or failed to use the bargaining power they had, got significantly smaller shares, even in proportion to the damage they suffered from the foreclosure crisis. As a result, struggling homeowners in Arizona, Georgia and other states are less likely to receive the settlement dollars that might keep them in their homes than Californians are.

Iowa Attorney General Tom Miller, the lead negotiator for the states, defended the division of funds, noting that California is the biggest state and that its residents have lost a huge amount of equity in their homes.

"We knew that [the funds] would go disproportionately throughout the country because the bubble was much worse in certain parts of the country," he said. "But we were all willing to go along with that because it made real sense for homeowners across the country."

The $25 billion mortgage agreement, which grew out of the robo-signing scandal, is the largest multistate deal since the national tobacco settlement of 1998. But the mortgage settlement was structured quite differently than the tobacco deal, where corporations cut checks directly to the states based on an agreed-upon formula.

A comparatively small part of the mortgage settlement works that way, but most of it does not.

The 49 participating states and the District of Columbia—Oklahoma didn't sign on—receive a total of $2.5 billion in direct cash payments. Each state's allocation was determined based on a straightforward formula that takes into account the state's share of foreclosure starts nationwide, in addition to its portions of seriously delinquent loans, residential loans serviced, and mortgages where the homeowner owes more than the home is worth.

California's allocation of that money is $411 million, or 16% of the nationwide total. That's in the general range that one might expect, given the state's size and its concentration of soured mortgages.

But a much larger part of the national settlement — $20 billion — is earmarked for consumer relief. That category includes short sales, refinances, and mortgage modifications, some of which involve principal reductions. The states themselves never receive these funds. The banks make arrangements with homeowners and credit the funds directly to customer accounts.

Iowa AG Miller, a Democrat, and some of his fellow attorneys general were determined to strike a deal that would require the banks to begin granting principal reductions, which were not yet happening on any large scale.

But to get there, Miller faced a Herculean task—trying to satisfy the interests of 50 different states, including both Democratic and Republican elected officials. While California and some other states were fighting for the largest possible share of the money, Democratic attorneys general from New York, Delaware and Massachusetts were pushing to preserve certain legal claims under the settlement.

(Later on, K&L Gates, a law firm, would title a report on the agreement "The Success of Herding Cats.")

The deal that Miller and federal representatives reached with the five banks—in addition to Bank of America, Chase and Wells Fargo, Citigroup and Ally Financial signed onto the agreement—did not include any requirement regarding how much of the consumer relief funds were to be distributed in each state.

That lack of specificity provided bargaining space for Harris, the California AG who broke off to hold separate talks with the banks.